Toy World

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Table A Condensed Income Statements, 1991-1993 (thousands of dollars)

1991 1992 1993

Net sales $5,213 $6,167 $7,967

Cost of goods sold 3,597 4,440 5,577
Gross profit $1,616 $1,727 $2,390
Operating expenses 1,199 1,542 1,912
Interest expense 68 75 85
Interest income 20 15 16
Profit before taxes $369 $125 $409
Federal income taxes 125 43 139
Net profit $244 $82 $270
Table B Balance Sheet at December 31, 1993 (thousands of dollars)

Cash $200
Accounts receivable 2,905
Inventory 586
Current assets $3,691
Plant and equipment, net 1,176
Total assets $4,867

Accounts payable $282

Notes payable, bank 752
Accrued taxesa 88
Long-term debt, current portion 50
Current liabilities $1,172
Long-term debt 400
Shareholders’ equity 3,295
Total liabilities and shareholders’ equity $4,867

a
The company was required to make estimated tax payments on the 15th of April, June,
September, and December. In 1993 it elected to base its estimated tax payments on the
previous year’s tax. The balance of $88,000 was due on March 15, 1994.
Table C Monthly Sales Data (thousands of dollars)

Sales Projected
1993 1994

January $64 $120

February 88 140
March 96 160
April 88 140
May 87 140
June 95 140

July 96 160
August 1,251 1,620
September 1,474 1,840
October 1,723 2,140
November 1,965 2,285
December 940 1,115
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

Actual
Dec. 31,
1993
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Casha $200 $878 $1,526 $1,253 $1,054 $915 $696 $527 $200 $200 $200 $200 $200
Accounts receivableb 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400
Inventoryc 586 586 586 586 586 586 586 586 586 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 $1,940 $1,781 $1,562 $1,413 $2,566 $4,246 $4,766 $5,211 $4,186
Net plant and equipmentd 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Total assets $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362

Accounts payablee $282 $36 $42 $48 $42 $42 $42 $48 $486 $552 $642 $686 $334
Notes payable, bankf 752 0 0 0 0 0 0 0 433 1,741 1,745 1,677 942
Accrued taxesg 88 31 (23) (162) (251) (305) (394) (448) (352) (271) (126) 33 40
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities $1,172 $117 $69 ($64) ($159) ($213) ($302) ($350) $617 $2,072 $2,311 $2,446 $1,366
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders’ equity 3,295 3,183 3,079 2,979 2,875 2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646

Total liabilities and equity $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362

a
Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt.
b
Assumed 60-day collection period.
c
Assumed inventories maintained at December 31, 1993 level for all of 1994.
d
Assumed equipment purchases equal to depreciation expense.
e
Assumed equal to 30% of the current month’s sales and related to material purchases of $3,000,000 for 1994 as against sales of $10 million. This represents a 30-day payment period. Since
inventories are level, purchases will follow seasonal production and sales pattern.
f
Plug figure.
g
Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In
estimating its tax liability for 1994, the company has the option of using the prior year’s tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the
company could estimate its 1994 tax liability directly. Toy World planned to use its prior year’s tax liability as its estimate and to pay $35,000 in April, June, September, and December.

h
To be repaid at the rate of $25,000 each June and December.
Current month purchases
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Net sales $120 $140 $160 $140 $140 $140 $160 $1,620 $1,840 $2,140 $2,285 $1,115
Cost of goods solda 84 98 112 98 98 98 112 1,134 1,288 1,498 1,600 780

Gross profit $36 $42 $48 $42 $42 $42 $48 $486 $552 $642 $685 $335

Operating expensesb 200 200 200 200 200 200 200 200 200 200 200 200
Interest expense 7 4 4 4 4 4 3 5 12 17 17 14
Interest incomec 2 4 5 4 3 3 2 1 1 1 1 1

Profit (loss) before taxes ($169) ($158) ($151) ($158) ($159) ($159) ($153) $282 $341 $426 $469 $122
Income taxesd (57) (54) (51) (54) (54) (54) (52) 96 116 145 159 42

Net Profit ($112) ($104) ($100) ($104) ($105) ($105) ($101) $186 $225 $281 $310 $80

a
Assumed cost of goods sold equal to 70% sales.
b
Assumed to be same for each month throughout the year.
c
Toy World expected to earn a 4% annualized rate of return on average monthly cash balances.
d
Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.
Total

$10,000
7,000

$3,000

2,400
95
28

$533
182

$351
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

Actual
Dec. 31,
1993
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Casha 200 620 807 200 200 200 200 200 200 200 200 200 200
Accounts receivableb 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400
Inventoryc 586 1,050 1,502 1,940 2,391 2,843 3,294 3,733 3,220 2,565 1,714 769 586

Current assets 3,691 2,731 2,568 2,440 2,891 3,323 3,774 4,233 5,200 6,225 5,894 5,394 4,186
Net plant and equipmentd 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Total assets 4,867 3,907 3,744 3,616 4,067 4,499 4,950 5,409 6,376 7,401 7,070 6,570 5,362

Accounts payablee 282 250 250 250 250 250 250 250 250 250 250 250 250
Notes payable, bankf 752 0 0 114 765 1,366 2,051 2,681 3,316 3,971 3,136 2,074 764
Accrued taxesg 88 28 -27 -168 -259 -316 -410 -469 -356 -253 -81 110 129
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities 1,172 328 273 247 807 1,350 1,941 2,513 3,261 4,018 3,354 2,484 1,194
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders’ equity 3,295 3,179 3,072 2,969 2,861 2,749 2,634 2,521 2,741 3,008 3,341 3,712 3,818

Total liabilities and equity 4,867 3,907 3,744 3,616 4,067 4,499 4,950 5,409 6,376 7,401 7,070 6,570 5,362

Assets except Cash 3,286 2,938 3,416 3,867 4,299 4,750 5,209 6,176 7,201 6,870 6,370 5,162
Liabilities except Notes payable 3,907 3,744 3,502 3,302 3,133 2,899 2,727 3,060 3,430 3,935 4,496 4,598

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
Production @ CGS 543 543 543 543 543 543 543 543 543 543 543 543
Inventory
Opening balance 586 1,050 1,502 1,940 2,391 2,843 3,294 3,733 3,220 2,565 1,714 769
Add production 543 543 543 543 543 543 543 543 543 543 543 543
Less sales @ CGS 78 91 104 91 91 91 104 1,055 1,198 1,393 1,488 726
Closing inventory 586 1,050 1,502 1,940 2,391 2,843 3,294 3,733 3,220 2,565 1,714 769 586
Excess over seasonal prod 464 916 1,354 1,805 2,257 2,708 3,147 2,634 1,979 1,128 183 0

Accrued Tax
Opening balance 88 28 -27 -168 -259 -316 -410 -469 -356 -253 -81 110
Add: tax accrued in month -60 -55 -53 -56 -58 -59 -58 113 138 172 191 55
Less: tax paid in month 88 35 35 35 35
Closing blance 88 28 -27 -168 -259 -316 -410 -469 -356 -253 -81 110 129
Assumptions

Balancing/Plug figure
same as seasonal
see below

computed
computed

computed

monthly purchase = 3000/12

Balancing/Plug figure
see below
unchanged

computed
unchanged
computed

computed

Peak Borrowing (notes) 3971

Credit line 2000

Loan is off books in Jan and Feb

Can allocate 115 in proportion to this row
If this is a variable cost
Exhibit 2 Pro Forma Income Statement Under LEVEL Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Net sales 120 140 160 140 140 140 160 1,620 1,840 2,140 2,285 1,115
Cost of goods solda 78 91 104 91 91 91 104 1,055 1,198 1,393 1,488 726

Gross profit 42 49 56 49 49 49 56 565 642 747 797 389

Operating expensesb 200 200 200 200 200 200 200 200 200 200 200 200
Operating expenses Storage 10 10 10 10 10 10 10 10 10 10 10 10
Interest expense 9 4 4 4 9 14 19 24 28 33 27 19
Interest incomec(negative) -1 -2 -3 -1 -1 -1 -1 -1 -1 -1 -1 -1

Profit (loss) before taxes -176 -162 -155 -165 -169 -174 -172 333 405 505 562 161
Income taxesd -60 -55 -53 -56 -58 -59 -58 113 138 172 191 55

Net Profit -116 -107 -102 -109 -112 -115 -113 220 267 333 371 106

Net profit for the year Interest

Level 523 194
Seasonal 351 95
Increase 172 49%
 Assumptions/Remarks

Total

10,000
6,510 65.10%

3,490

2,400
115 115 simple way:equal. Revisit this later
194 9 5/8% on long term and 9% on notes (prev month closing)
-11 4% on previous month closing

793
269 34%

523