In 250-350 words, explain what cash flow is and why cash is so important to a business.

ICS Manufacturing Company produces plastic parts for the automotive industry.  Here is their Income Statement for 2015 –


ICS Manufacturing Company

Income Statement for 2015


Sales Revenue                                                $35,500,000

Cost of Goods Sold                                12,725,000

Selling, General & Admin Exp                          11,200,000

Depreciation Expense                             3,200,000

EBIT                                                        8,375,000

Interest Expense                                         350,000

Taxable Income                                      8,025,000

Taxes                                                       3,210,000

Net Income                                              4,815,000


Transfer this income statement to an Excel spreadsheet and begin to prepare a Pro Forma Income statement for 2016 based on the following information:


  1. Sales revenue to increase 5.2%, COGS to increase 4.5%, S,G&A will increase 3.8% and depreciation expense will be $3,255,000.Assume interest expense to be $375,000 and taxes are to be 40% of taxable income.  You will now have income statements for 2015 and 2016 for ICS Manufacturing.


This is the balance sheet information for ICS Manufacturing Company:


ICS Manufacturing Company

Balance Sheet for year ending December 31, 2015


Assets                                                                             Liabilities

Cash                               $2,625,000                             Accounts Payable            $5,825,000

Accounts Receivable     $2,715,000                              Other Current Liabilities $3,365,000

Inventories                      $1,514,000                               Total Current Liabilities   $9,190,000

Total Current Assets        $6,854,000



Long Term Assets                                                       Long Term Liabilities

P, P & E                      $12,745,000                                       Long Term Debt                $1,225,000            Goodwill                         $1,205,000                           Other LT Debt                      $2,230,000

Intangible Assets             $5,275,000                           Total LT Liabilities            $3,455,000

Total LT Assets            $19,225,000                                       Total Liabilities                            $12,645,000

Total Assets                 $26,079,000



Owners’ Equity

Common Stock                 $6,425,000

Retained Earnings            $7,009,000

Total Owners’ Equity     $13,434,000

Total Liab/OE                $26,079,000


Transfer this balance sheet to an Excel spreadsheet and begin to prepare a Pro Forma Balance Sheet for 2016 based on the following information:


  1. Cash will increase to $2,825,000 and accounts receivable will increase by 15%.The inventories will go up 35% and P, P, &E will go up $2,000,000 with an expansion to the plant. Long term debt will increase to $2,000,000 to help finance the plant expansion and add $1,137,150 to other LT debt.. You will now have balance sheets for 2015 and 2016 for ICS Manufacturing.



Using the 2015 and 2016 financials for ICS, complete the following – show calculations and/or numbers you used to derive your answer:


  1. ICS wants to take around $400,000 of its cash and invest in marketable securities. They anticipate receiving around $7.5% interest on their investment and would like to have it held for 10 years. What will be the FV of this $400,000 investment?


  1. ICS believes they will only gain a 6% return on their $400,000 investment. Using the Rule of 72, how many years will it take to double their investment?


  1. ICS plans on expanding their plant and will fund $2,000,000. Part of the funding will come from cash, but the balance of $775,000 will be financed. The interest rate will be 5% and ICS plans on borrowing the funds for 4 years. Prepare a loan amortization schedule for the 4 years with 5% interest for the $775,000 and assume making one payment per year. Show the schedule.


  1. Using your 2015/2016 Income Statement and Balance Sheet, add a column for percentage of total.Compute the percentages for each line item for the financial statements.  For the 2015 Income Statement, what is the percentage of COGS as compared to total sales? Is this figure reasonable and what is COGS and why is it important to a company?


  1. Financial Ratios provide information to analyze a company’s performance.Solve the following ratios for 2015 and 2016 using the Income Statement and Balance sheets you prepared for ICS Manufacturing.


  1. Current Ratio – current assets/current liabilities
  2. Quick Ratio – (current assets – inventories)/current liabilities
  3. Cash Ratio – cash/current liabilities
  4. Debt Ratio – total liabilities/total assets
  5. Cash Coverage Ratio – (EBIT + depreciation/interest expense
  6. Inventory Turnover – cost of goods sold/inventory
  7. Receivables Turnover – sales/accounts receivable
  8. Total Asset Turnover – sales/total assets
  9. Profit Margin – net income/sales
  10. Return on Equity – net income/total owner’s equity



  1. Findthe industry ratios for the company using the Dun & Bradstreet® Key Business Ratios.   Locate the Dunn & Bradstreet Database by accessing the University of Phoenix Library and then locating Library Resources. Click on Alphabetical List of Resources and find Dunn and Bradstreet. Click on the link and search for your selected company. ISC is a manufacturing company of plastic parts for the automotive industry – try and select a company closest to our company.Please use 3089 Plastic Products and NAICS of 326199 for manufacturing using 2014 data and the lower amount.  Only provide the Quick and Current Ratios from 2015/2016 from problem 7 and add the ratios from Dun & Bradstreet to compare and briefly suggest what direction ICS should head into with the comparison.



  1. ICS plans to expand their operations as stated in Problem 5 – and are considering taking the loan – however, they have a few investors that are interested in lending money for this venture.They need a total of $775,000, and if they lend the money today, ICS will repay it, with interest, at the end of the year.  Company A agrees to lend $300,000 and they require 5% interest, Company B will lend $200,000 at 6% interest, and Company C will loan the balance but they won’t settle for less than 10% interest.  What is the weighted average cost of this capital (WACC)?



  1. In 250-350 words, explain what cash flow is and why cash is so important to a business.

Include in your analysis the cash that ICS maintains on hand and whether it is sufficient or not.

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