What causes differences between available balances and book balances?
Available balance refers to the cash balances that a firm has as the bank statements. This is the ending balance of a firm reflected on bank records of its bank. It represents the maximum amount a firm can withdraw without taking an overdraft. Book balance refers to the bank balance as per the firm’s books of account. Normally, the available balance and book balances do not agree for the reasons discussed below.
The first reason is outstanding checks. Some checks received by a firm may have not been deposited in time. These checks will therefore appear in the records of the books of the firm however they will not appear in the bank records. Some checks written by the firm may have not been presented to the bank. These checks will therefore appear in the records of the books of the firm however they will not appear in the bank records. The second reason is deposits in transit. These are deposits made by a bank but have not been reflected in the bank balance by the bank yet the firm has already posted them in the books of account.
Thirdly, there are some costs that can only be recorded after receiving the bank statement. Such expenses include; bank service charges, bank overdraft interest expense, electronic charges and check printing charges. There are also some incomes that can only be recorded after receiving the bank statement such as interest income. Excluding these costs and income is another source of disparity between available balance and book balance. Lastly, errors could be another source of differences between available and book balances. An error may be made by the bank or the firm while keeping books of account resulting in the difference.
A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what are the APR and the APY of the loan assuming annual payments?
The Salt Lake Ski Company wants to make a $200,000 credit purchase from your firm. Your investment in the credit sale is 70% of the amount of the sale. You estimate that Salt Lake has a 95% probability of paying you on time, which is in three months, and a 5% probability of paying nothing. If the opportunity cost of funds is 18% per year, what is the net present value of granting credit?
Explain the ideas behind the percent for sales forecasting method.
Percentage sales method refers to an approach to financial forecasting that is founded on the premise that income statement and balance sheet accounts normally vary with sales. The key determinant for this approach to financial forecasting is the sales forecast. Based on the sales forecast the forecasted financial statement is constructed and the company’s external financing needs are identified.
The first normally is express income statement and balance sheet items that vary directly with the sales revenue as a percentage of sales. This is achieved by dividing the current year’s balances with the current year’s sales revenue. The balance sheet items that vary with sales include; accounts receivables, cash, accounts payable and inventory. Unless there is excess capacity, fixed assets also vary with sales. All variable costs in the income statement can be expressed as a percentage of sales. Net income can be expressed as a percentage of sales as the net profit margin.
This is then followed by preparing pro-forma financial statements. Determine the forecasted sales revenue. This is obtained by multiplying the current year’s sales revenue by 100 percent plus the projected growth in sales. Once the projected sales revenue has been determined, the balance sheet items and income statement items can be determined. This is done by multiplying the computed percentages by the projected sales revenue. The items in the income statement and balance sheet that do not vary with sales revenue are transferred to the projected financial statements at their current year’s levels. However, the retained earnings to be included in the projected financial statements are determined differently. The current year’s level of retained earnings is added to the projected addition to the amount of retained earnings.
References
Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management Theory and Practice (13 ed.). London: Cengage Learning.
Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate financial management (3, revised ed.). New Jersey: Prentice Hall.
Vishwanath, S. R. (2007). Corporate Finance: Theory and Practice (2, illustrated ed.). New York: SAGE.
