MetCast Inc.

Michael Johnson is CEO of MetCast Inc., which specializes in the manufacturing of alloy casts used in motors used
in electric vehicles. Being a graduate in mechanical engineering, he founded the company in the year 2011 by investing
the funds procured from his personal sources. Being in the sunrise sector and with a rise of companies like Tesla and
hybrid models launched by other major car makers, the company tasted instant success and was supplying the motor
casts to different automobile manufacturing firms. Few venture capitalists showed interest in the business and financed
a major expansion by taking over 40% of the equity of the firm. The business has grown in the year 2014 also, and
management is considering to diversify the product line by venturing into manufacturing of aluminum based motor
casts used in electric two wheelers. It will require further capex of $5,00,000 in plant and machinery and around
$1,00,000 as the reserve for working capital requirements. Management, however, is not keen to raise the funds by
issuing further equity. An industrial bank has proposed to finance 45% of the expansion and rest might have to be
generated by the internal sources of the company. The CFO of the company is asked to present the financial statements
of the company so that the feasibility of aforesaid expansion can be evaluated at the earliest. The balance sheet of the
company as on 31.12.2013 is available in Exhibit 1 and finance department has the following information related to
operations for the financial year ending 31.12.2014:
REVENUES
As the company is in B2B sales, its customer count is limited. It supplies its products primarily to five automobile
manufacturers and ten fringe ancillary manufacturers. Average credit period offered by the company is 1 month, and
it offers a cash discount of 2% if the customer makes an upfront payment. During the year, the gross sales for the
company were $32,00,000 out of which sales worth $5,00,000 (before deducting discount) was on cash basis and
remaining on credit. During the year, $26,50,000 were collected from customers who had availed credit. A batch of
goods supplied worth $50,000 was found to be defective and was returned by the customer (the sale was originally
done on credit and hence customer was issued a credit note for the amount). MetCast had started selling to the ancillary
manufacturers some time back and was aware of inherent credit risk in these accounts. One of these manufacturers
filed a Chapter 11 bankruptcy in the year 2014 and hence MetCast had to write-off $10,000 outstanding on this account.
Metcast, as a policy, carries a provision of 5% of the amount outstanding from the customers at the end of each year.
MANUFACTURING COSTS
MetCast procures the primary raw material (metal blocks) from a single supplier. The supplier offers a credit period
of 15 days and cash discount of 1% on upfront payment. During the year company received gross purchase invoices
of $12,00,000 from the supplier out of which purchases worth $2,00,000 were on cash. A lot of goods worth $30,000
was found to be of substandard quality and hence was returned to the supplier (this purchase was on credit and hence
the supplier issued a credit note to MetCast). $8,70,000 were paid to the supplier during the year on account of credit
purchases. Material worth $50,000 was used in the construction of an in-house machinery which was completed at the
end of the financial year 2014. On physical stocktaking at the end of the year 2014, the company had a stock of raw
material worth $70,000. Work-in-Progress at the end of year 2014 amounted to $35,000. Inventory of finished goods
at the end of the year 2014 was valued at $80,000.
Wages amounting to $4,00,000 were paid to workers during the year which included an amount of $10,000 paid to
workers for constructing the in-house machinery mentioned above. Workers are usually paid with a lag of 15 days.
Wages outstanding at the end of the year 2014 amounted to $30,000.
Apart from the machinery constructed in-house, MetCast also paid $1,20,000 for a machinery imported from China in
a ready to use condition. The machinery was commissioned on 01.07.2014. Also, a part of the machinery, costing
$12,000 (having a book value of $10,000) was disposed of for $6,000 at the beginning of the year 2014. The part was
faulty, and its replacement was not considered to be necessary as it was more of an accessory unit rather than a utility

unit. MetCast charges depreciation @ 15% p.a. on machinery and equipment and @10% p.a. on factory building using
written down value method.
Other expenses incurred in factory in year 2014 include:

Utilities
Consumables
Factory Rent
Factory Salaries
Factory Insurance

:
:
:
:
:

Paid - $80,000; Outstanding at the end of the year - $15,000

Paid - $10,000; Outstanding at the end of the year NIL
Paid - $1,00,000; Paid in advance at the end of the year - $20,000
Paid - $90,000; Outstanding at the end of the year - $15,000
Paid - $70,000 (effective from 01.07.2014 till 30.06.2015)

SALES & GENERAL ADMINISTRATION EXPENSES

Apart from factory workforce, the company also has salaried employees stationed in head office who look after
administration and sales departments. In 2014, $1,90,000 was disbursed as salaries and $20,000 were still outstanding
at the end of the year 2014. General Administration expenses (including office rent, and stationary, electricity,
communication, legal and other miscellaneous office expenses) amounted paid during 2014 amounted to $2,40,000
and $10,000 are still outstanding at the end of the year 2014. Office Equipment & Furniture worth $30,000 were
procured at the beginning of the year 2014 and are to be depreciated @ 20% p.a. using written down value method.
DEBT & FINANCING CHARGES
MetCast raised a term finance (5-year duration) in the year 2013. The originally disbursed amount was $5,00,000
carrying a coupon rate of 8% p.a. The loan was to be repaid in 60 equal monthly installments of $10,138. In the
previous year (i.e. 2013), a total of $1,21,658 was repaid out of which interest constituted $36,938 and principal repaid
was $84,720. In the current year, an interest of $29,907 and principal of $91,752 has been repaid. In the next year, an
interest of $22,291 and principal of $99,367 is to be repaid.
TAXATION
MetCast makes a provisional assessment of tax each year and periodically deposits corporate tax in advance with the
exchequer. The final assessment is done in the year following the relevant financial year. In the year 2014, the final
tax liability for the financial year 2013 was assessed at $1,20,000. Provisional liability for 2014 was estimated at
$1,55,000 and advance tax of $1,60,000 was deposited with the revenue department during the year 2014.
GOODWILL & OTHER INTANGIBLES
In the year 2012, MetCast had acquired a small cast making firm which specialized in manufacturing high quality
customized cast. MetCast had paid $2,00,000 for the acquisition out of which $80,000 were for the acquired goodwill
of the firm. As per policy, MetCast must write off the acquired goodwill in five equal annual installments beginning
from the year 2012.
Assignment Questions:
1.
2.
3.
4.

Prepare T-Accounts for all the transactions done by MetCast for the year 2014
Prepare Income Statement, Balance Sheet and Cash Flow Statement for the year ending 31.12.2014
Comment upon resource availability to go for expansion in next financial year
Comment upon performance of business over a period of two years

EXHIBIT 1
Balance Sheet of MetCast Inc. as on 31.12.2013
Particulars
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Equity Share Capital
Retained Earnings
NON-CURRENT LIABILITIES
Long Term Borrowings ($5,00,000 - $84,720 - $91,752)
Deferred Tax Liabilities
Long Term Provisions
Other Non-Current Liabilities
CURRENT LIABILITIES
Short Term Borrowings
Accounts Payable
Short Term Provisions (Provision for Income Tax)
Other Current Liabilities
Wages Due
$35,000
Utilities Due
$18,000
Salaries Due (Factory: $10,000; SGA: $25,000)
$35,000
Current Portion of Long Term Borrowings
$91,752
TOTAL SOURCES OF FUNDS
APPLICATION OF FUNDS
NON-CURRENT ASSETS
Tangible Fixed Assets
Plant & Equipment
$17,10,000
Factory Building
$3,60,000
Office Equipment & Furniture
$2,40,000
Intangible Fixed Assets (Goodwill)
Capital Work-In-Progress
Deferred Tax Assets
Intangible Assets Under Development
Non-Current Investments
Other Non-Current Assets
CURRENT ASSETS
Current Investments
Inventories
Raw Material
$50,000
Work-in-Progress
$40,000
Finished Goods
$95,000
Accounts Receivables
Gross
$1,10,000
Less: Provision for Doubtful Debts
($5,500)
Cash & Cash Equivalents
Short Term Loans and Advances
Other Current Assets
Factory Rent
$20,000
Advance Tax
$1,25,000
Pre-Paid Insurance
$30,000
TOTAL APPLICATION OF FUNDS

Details

Amount ($)

$4,10,000
$18,00,000

$22,10,000

$3,23,528
NIL
NIL
NIL

$3,23,528

NIL
$50,000
$1,05,000

$1,79,752

$23,10,000
$48,000
NIL
NIL
NIL
NIL
NIL

$3,34,752
$28,68,280

$23,58,000

NIL

$1,85,000

$1,04,500
$45,780
NIL

$1,75,000

$5,10,280
$28,68,280