Reference no: EM132245812

Forecasting Sales and Net Income

In Year 2006, Cough is in its second year of operations. Cough produces children's cough medicine. Industry sales of children's cough medicine for 2005 totaled $3 billion. For 2005, Cough had sales totaling $2.4 million (0.08% market share).

Required:

a. Explain how predictions of the total market and market share can be used in the forecasting process.

b. What data might you seek to enhance your sales forecast and how might such data be gathered?

c. Illustrate what-if scenarios in which market share gained by Cough.com is (1) 5% greater than and (2) 5% worse than the predicted 0.08% of the Year 2006 expected industry sales of $3.2 billion.

d. For each of these two separate scenarios, illustrate what-if analysis when total expected industry sales of $3.2 billion are (1) 10% greater than and (2) 10% worse than expected.

Analyzing Measures of Short-term Liquidity

Refer to the financial statements of Campbell Soup Company in Appendix A.

Required:
a. Compute the following liquidity measures for Year 10:
(1) Current ratio.
(2) Acid-test ratio.
(3) Accounts receivable turnover (accounts receivable balance at end of Year 9 is $564.1).
(4) Inventory turnover (inventory balance at end of Year 9 is $816.0).
(5) Days' sales in receivables.
(6) Days' sales in inventory.
(7) Conversion period (operating cycle).
(8) Cash and cash equivalents to current assets.
(9) Cash and cash equivalents to current liabilities.
(10) Days' purchases in accounts payable.
(11) Net trade cycle. (12) Cash flow ratio.

b. Assess Campbell's liquidity position using results from (a).
c. For Year 10, compute ratios 1, 4, 5, 6, and 7 using inventories valued on a FIFO basis (FIFO inventory at the end of Year 9 is $904).
d. What are the limitations of the current ratio as a measure of liquidity?
e. How can analysis and use of other related measures (other than the current ratio) enhance the evaluation of liquidity?

Interpreting Effects of Transactions on Liquidity Measures

Interpret the effect of the following six independent events and transactions for each of the following:

a. Accounts receivable turnover (equals 4.0 prior to the event).
b. Days' sales in receivables.
c. Inventory turnover (equals 4.0 prior to the event).

The three columns to the right of each event and transaction are identified as (a), (b), and (c) cor¬responding to the three liquidity measures. For each event and transaction indicate the effect as an increase (I), decrease (ID), or no effect (NE).

Events and Transactions
1. $5,000 of accounts receivable are written off by a charge to allowance for doubtful accounts.
2. Beginning inventory understatement of $1,000 is corrected this period.
3. Under the lower-of-cost-or-market method, inventory is reduced to market by $2,000.
4. Obsolete inventory of $3,000 is identified and written off
5. Beginning inventory overstatement of $2,000 is corrected this period.
6. Sales on account are overstated by $10,000 and corrected this period.