Essay About Assumptions Mr. Schultz And Forecast Data

Cutrite Shears Case Study
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Cutrite Shears, Inc.Homework #1  Section: Monday AfternoonGroup: Marland Hobbs (working alone)Due Monday, January 11, 2016, at Noon Please submit your assignment electronically via the Chalk site, indicating your section and group members.(40 points). Why was Cutrite Shears unable to repay its bank loan by March 31, 1970 as originally forecast? Please consider monthly variations of actual data from forecast data, with respect to both the balance sheet and income statement, in preparing your answer. Comment upon the assumptions Mr. Schultz made when drawing up the original forecasts.There were significant differences between what was forecasted by Mr. Schultz and what actually transpired. First, there were deltas between forecasted sales figures. For example in February of 1970, the sales figure and net income figures were 17% and 95.6% less than what was forecasted. Schultz explained that this was due to a recession in the economy. Inventories starting in September of 1969 were significantly higher than forecasted as result of sales drop peaking in January 1970 when inventories were 18.2% higher. Additionally, current liabilities jumped 30% and 100% higher in November in December of 1969. Schultz was starting to have cash tied up in assets with increasing short term liabilities. Schultz increased purchases in September and October of 1969 to 280 and 290 from 260 at a time when sales were decreasing in comparison to the budget. This decision makes little sense. Second, Schultz made erroneous assumptions regarding collections and payables periods. He incorrectly forecasted how much the expenditures for modernization would cost by 150K. Also, he eventually had to lay off labor because he could not afford to pay them creating additional costs. He assumed that collections would lag behind sales by 45 and that he would have a 30 payment period. These assumptions were incorrect as discussed below. 2. (30 points).  Determine Cutrite’s liquidity position at the end of each quarter, 9/30/69 through 3/30/1970, versus the forecast. Determine the actual versus forecast differences in Cutrite’s current ratio, acid-test ratio, receivables-to-sales ratio, collection period, inventory turnover, total debt to net worth, and net income to net worth. Comment upon whether these ratios are within normative ranges.Ratios – ActualJul-69Aug-69Sep-69Oct-69Nov-69Dec-69Jan-70Feb-70Mar-70Collection period              41                   42                   43                   42                   49                   60              68                  55              53 Inventory turnover            193                152                123                   88                   99                116            197                197            230 Days sales in cash              21                   12                   11                     9                   11                   12              27                  27              23 Payables period              18                   14                   13                   11                   12                   12              20                  18              16 Debt to Asset37.2% 39.6% 40.8% 40.2% 38.6% 38.2% 36.9% 35.8% 35.4% Debt to Equity59.1% 65.6% 68.9% 67.3% 62.9% 61.8% 58.4% 55.9% 54.9% Current Ratio             5.2                 3.1                 2.8                 2.9                 3.4                 3.3             3.9                 4.6             5.2 Net income to net worth0.4% 0.8% 1.0% 2.0% 1.5% 1.1% 0.3% 0.0% (0.1%)Recievables to sales             1.4                 1.4                 1.4                 1.4                 1.6                 2.0             2.3                 1.8             1.8 Acid-test ratio             1.8                 1.1                 1.1                 1.4                 1.7                 1.7             1.7                 1.8             1.8 Ratios – ProformaJul-69Aug-69Sep-69Oct-69Nov-69Dec-69Jan-70Feb-70Mar-70Collection period              41                   42                   42                   41                   47                   48              54                  45              48 Inventory turnover              68                   69                   70                   62                   79                   80              89                  75              79 Days sales in cash              17                   13                   11                     8                     9                   11              38                  46              38 Payables period              18                   14                   12                     8                   10                   12              19                  19              22 Debt to Asset36.6% 39.6% 40.1% 39.2% 36.8% 34.5% 34.6% 34.8% 34.0% Debt to Equity57.8% 65.6% 67.0% 64.4% 58.3% 52.8% 53.0% 53.3% 51.5% Current Ratio             5.8                 3.2                 3.0                 3.2                 4.3                 6.0             5.7                 5.5             6.9 Net income to net worth0.6% 1.0% 1.5% 1.9% 1.9% 1.4% 0.5% 0.5% 0.3% Receivables to sales             1.4                 1.4                 1.4                 1.4                 1.6                 1.6             1.8                 1.5             1.6 Acid-test ratio             1.9                 1.2                 1.3                 1.7                 2.4                 3.2             3.0                 2.8             3.0 Ratios – Actual – Proforma (delta)Jul-69Aug-69Sep-69Oct-69Nov-69Dec-69Jan-70Feb-70Mar-70Collection period                 0                     0                     1                     1                     2                   12              14                  10                 5 Inventory turnover            125                   82                   52                   26                   21                   37            108                122            151 Days sales in cash                 3                   (1)                    0                     1                     2                     1             (11)                (20)            (15)Payables period                 0                   (0)                    1                     3                     2                     0                 1                   (1)              (6)Debt to Asset0.5% 0.0% 0.7% 1.0% 1.8% 3.6% 2.2% 1.1% 1.4% Debt to Equity1.3% 0.0% 1.9% 2.9% 4.6% 9.0% 5.4% 2.6% 3.3% Current Ratio           (0.6)               (0.0)               (0.2)               (0.4)               (0.9)               (2.7)          (1.8)              (0.9)          (1.6)Net income to net worth     (0.0015)        (0.0023)        (0.0051)          0.0016         (0.0042)        (0.0036)    (0.0023)        (0.0049)    (0.0037)Receivables to sales             0.0                 0.0                 0.0                 0.0                 0.1                 0.4             0.5                 0.3             0.2 Acid-test ratio           (0.1)               (0.0)               (0.1)               (0.3)               (0.7)               (1.6)          (1.3)              (1.0)          (1.2)