Cash Outflows

Next, we consider the cash disbursements, or payments. These come in four basic categories:

1. Payments of accounts payable. These are payments for goods or services rendered by suppliers, such as raw materials. Generally, these payments will be made sometime after purchases.

2. Wages, taxes, and other expenses. This category includes all other regular costs of doing business that require actual expenditures. Depreciation, for example, is often thought of as a regular cost of business, but it requires no cash outflow and is not included.

3. Capital expenditures. These are payments of cash for long-lived assets.

4. Long-term financing expenses. This category includes, for example, interest payments on long-term debt outstanding and dividend payments to shareholders.

Fun Toys's purchases from suppliers (in dollars) in a quarter are equal to 60 percent of the next quarter's predicted sales. Fun Toys's payments to suppliers are equal to the previous quarter's purchases, so the accounts payable period is 90 days. For example, in the quarter just ended, Fun Toys ordered .60 X $200 = $120 in supplies. This will actually be paid in the first quarter (Q1) of the coming year.

Wages, taxes, and other expenses are routinely 20 percent of sales; interest and dividends are currently $20 per quarter. In addition, Fun Toys plans a major plant expansion (a capital expenditure) costing $100 in the second quarter. If we put all this information together, the cash outflows are as shown in Table 19.4.

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