Assignment Type Group Project Deliverable Length 1 Excel Spr

Assignment Typegroup Projectdeliverable Length1 Excel Spreadsheet An

Please read the relevant parts of your textbook, which refer to cash flow and financial planning. To avoid any uncertainty regarding his business' financing needs at the time when such needs may arise, Cyrus Brown wants to develop a cash budget for his latest venture: Cyrus Brown Manufacturing (CBM). He has estimated the following sales forecast for CBM over the next 9 months: March $100,000 April $275,000 May $320,000 June $450,000 July $700,000 August $700,000 September $825,000 October $500,000 November $115,000 He has also gathered the following collection estimates regarding the forecast sales: · Payment collection within the month of sale = 25% · Payment collection the month following sales = 55% · Payment collection the second month following sales = 20% Payments for direct manufacturing costs like raw materials and labor are made during the month that follows the one in which such costs have been incurred. These costs are estimated as follows: March $187,500 April $206,250 May $375,000 June $337,500 July $431,250 August $640,000 September $395,000 October $425,000 Additional financial information is as follows: · Administrative salaries will approximately amount to $35,000 a month. · Lease payments around $15,000 a month. · Depreciation charges, $15,000 a month. · A one-time new plant investment in the amount of $95,000 is expected to be incurred and paid in June. · Income tax payments estimated to be around $55,000 will be due in both June and September. · And finally, miscellaneous costs are estimated to be around $10,000 a month. · Cash on hand on March 1 will be around $50,000, and a minimum cash balance of $50,000 shall be on hand at all times. To receive full credit on this assignment, please show all work, including formulas and calculations used to arrive at the financial values. Group Project Guidelines: · As a group, prepare a monthly cash budget for Cyrus Brown Manufacturing for the 9-month period of March through November. · Use Microsoft Excel to prepare the monthly cash budget XYZ Corporation expensed on the financial statements $2,000,000 for depreciation expense during the year using straight line depreciation and deducted $3,000,000 of depreciation on the tax return using DDB depreciation. Also, the corporation expensed $1,000,000 of warranty expense on the income statement using an estimate of work to be done on current year’s sales (matching) but deducted on the tax return only $600,000 of warrant work since tax law only allows deduction of work done – no estimates. The corporation’s tax rate is 30%. What is the deferred tax asset or liability at the end of the year – show work – see if you can compute how many taxes have been postponed or had to be prepaid because of the financial statement and tax return differences.

Paper For Above instruction

The task of preparing a comprehensive cash budget for Cyrus Brown Manufacturing (CBM) over the period from March to November involves detailed calculation of cash inflows and outflows, aligning sales collection estimates, manufacturing payments, operating expenses, investments, taxes, and other miscellaneous costs. This process enables the firm to project its liquidity position, identify potential shortfalls, and plan necessary financing activities. Additionally, analyzing the deferred tax assets or liabilities resulting from differences between financial accounting depreciation and tax depreciation provides insight into the timing of tax payments and deferrals, which is essential for effective tax planning and financial statement accuracy.

Cash Budget Preparation

The primary objective in developing the cash budget is to forecast monthly cash receipts and disbursements based on the given data. The starting point involves estimating cash inflows from sales collections, which follow a three-tiered collection pattern. For each month, the cash inflow is composed of the current month’s sales collection, the collection from the previous month, and the collection from two months prior, weighted according to the provided percentages.

Sales forecast data indicates escalating sales over the period, with a peak in September and a significant drop in November. The collection pattern (25% in the sales month, 55% in the next, 20% in the second following) significantly impacts the timing of cash inflows. For instance, March sales contribute cash in March (25%) and April (55% of March sales), and so forth. Explicit calculations involve multiplying each month’s sales by the respective collection percentages and summing these to determine total monthly cash collections.

On the disbursement side, direct manufacturing costs are paid one month after the incurred period, requiring accurate scheduling to avoid cash shortfalls. Operating expenses such as salaries, lease payments, miscellaneous costs, and depreciation (which is a non-cash expense) are included in the cash payments, with particular attention to the upcoming capital expenditure in June and tax obligations in June and September.

The cash on hand at the start of March ($50,000) functions as the initial balance. The minimum cash balance of $50,000 must be maintained, leading to possible financing needs if projected cash balances fall below this threshold. The final cash flow projection is achieved by aggregating inflows and outflows month by month, accounting for the beginning cash position, and ensuring compliance with the minimum cash requirement.

Calculations involve specific formulas, such as:

Total Cash Collections for March = 25% of March Sales + 55% of February Sales (assumed zero if not available) + 20% of January Sales (assumed zero)
And similarly for subsequent months, adapting the sales data accordingly.

Analysis of Deferred Tax Assets and Liabilities

The second part of the assignment requires analyzing the differences stemming from depreciation and warranty expense treatments on financial statements versus tax returns. The firm reports $2,000,000 depreciation using straight-line, while the tax deduction applies DDB depreciation of $3,000,000. Calculating the difference involves comparing the depreciation expense levels per accounting and tax, revealing a timing difference that creates deferred tax assets or liabilities.

For depreciation, the excess depreciation in the tax return ($3,000,000) compared to the financial statement ($2,000,000) results in higher depreciation deductions for tax purposes, leading to lower taxable income and thus a deferred tax liability (DTL). The amount of the DTL is calculated as the difference in depreciation multiplied by the tax rate.

Similarly, warranty expenses are estimated at $1,000,000 on the financials but only $600,000 on the tax return. This indicates that more expenses are recognized on financial statements than allowed for tax purposes, creating a deferred tax asset (DTA). The net effect of these differences determines the overall deferred tax position at the year's end.

Explicit calculations include:

Difference in depreciation = $3,000,000 - $2,000,000 = $1,000,000
Deferred tax liability = $1,000,000 * 30% = $300,000
Difference in warranty expense = $1,000,000 - $600,000 = $400,000
Deferred tax asset = $400,000 * 30% = $120,000
Net deferred tax position = $300,000 (liability) - $120,000 (asset) = $180,000 liability

Conclusion

Constructing an accurate cash budget equips CBM with a clear understanding of its liquidity needs, potential to secure short-term financing, and optimal cash management strategies. The detailed collection and disbursement schedules reveal periods of surplus or deficit, guiding cash management decisions. Moreover, analyzing deferred tax assets and liabilities ensures the firm accurately reports its financial position, aligning tax strategies with financial reporting obligations. Effective management of both cash flows and tax timing differences is crucial for sustaining operational stability and optimizing tax liabilities, ultimately enhancing shareholder value and firm growth.

References

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