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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 3597 4440 5577
Gross profit $1,616 $1,727 $2,390
Operating expenses 1199 1542 1912
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 2905
Inventory 586
Current assets $3,691
Plant and equipment, net 1176
Total assets $4,867

Accounts payable $282


Notes payable, bank 752
Accrued taxes(a) 88
Long-term debt, current portion 50
Current liabilities $1,172
Long-term debt 400
Shareholders' equity 3295
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.
ril, June, September,
vious year's tax. The
Table C: Monthly Sales Data (thousands of dollars)

Sales Total Jan Feb Mar Apr May


1993 Actual $7,967 $64 88 96 88 87
1994 Projected $10,000 $120 140 160 140 140
Jun Jul Aug Sep Oct Nov Dec
95 96 1251 1474 1723 1965 940
140 160 1620 1840 2140 2285 1115
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

Actual
Dec. 31,
Note 1993 Jan. Feb. Mar. Apr.

Cash (a) $200 $878 $1,526 $1,253 $1,054


Accounts receivable (b) 2905 1060 260 300 300
Inventory (c) 586 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 $1,940


Net plant and
equipment (d) 1176 1176 1176 1176 1176

Total assets $4,867 $3,700 $3,548 $3,315 $3,116

Accounts payable (e) $282 $36 $42 $48 $42


Notes payable, bank (f) 752
Accrued taxes (g) 88 31 -23 -162 -251
Long-term debt, current portion 50 50 50 50 50

Current liabilities $1,172 $117 $69 ($64 ($159


Long-term debt (h) 400 400 400 400 400
Shareholders' equity 3295 3183 3079 2979 2875

Total liabilities
and equity $4,867 $3,700 $3,548 $3,315 $3,116

Notes:
(a)Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is o

(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 1
This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal produc

(f)Plug figure.

(g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and Dec
each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the opti
($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company cou
Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, Septem

(h)To be repaid at the rate of $25,000 each June and December.


thousands of dollars)

May June July Aug. Sept. Oct. Nov.

$915 $696 $527 $200 $200 $200 $200


280 280 300 1780 3460 3980 4425
586 586 586 586 586 586 586

$1,781 $1,562 $1,413 $2,566 $4,246 $4,766 $5,211

1176 1176 1176 1176 1176 1176 1176

$2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387

$42 $42 $48 $486 $552 $642 $686


433 1741 1745 1677
-305 -394 -448 -352 -271 -126 33
50 50 50 50 50 50 50

($213 ($302 ($350 $617 $2,072 $2,311 $2,446


400 375 375 375 375 375 375
2770 2665 2564 2750 2975 3256 3566

$2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387

onths when company is out of debt.

ases of $3,000,000 for 1994 as against sales of $10 million.


follow seasonal production

September 15, and December 15, 1994, payments of 25%


e company has the option of using the prior year's tax liability
tively, the company could estimate its 1994 tax liability directly.
00 in April, June, September, and December.
Dec.

$200
3400
586

$4,186

1176

$5,362

$334
942
40
50

$1,366
350
3646

$5,362
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May

Net sales $120 $140 $160 $140 $140


Cost of goods sold(a) 84 98 112 98 98

Gross profit $36 $42 $48 $42 $42

Operating expenses(b) 200 200 200 200 200


Interest expense 7 4 4 4 4
Interest income(c) 2 4 5 4 3

Profit (loss) before taxes ($169 ($158 ($151 ($158 ($159


Income taxes(d) -57 -54 -51 -54 -54

Net Profit ($112 ($104 ($100 ($104 ($105

(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 shee
ands of dollars)

June July Aug. Sept. Oct. Nov. Dec.

$140 $160 $1,620 $1,840 $2,140 $2,285 $1,115


98 112 1134 1288 1498 1600 780

$42 $48 $486 $552 $642 $685 $335

200 200 200 200 200 200 200


4 3 5 12 17 17 14
3 2 1 1 1 1 1

($159 ($153 $282 $341 $426 $469 $122


-54 -52 96 116 145 159 42

($105 ($101 $186 $225 $281 $310 $80

cash balances.

es shown on balance sheet. The federal tax rate on all earnings was 34%.
Total

$10,000
7000

$3,000

2400
95
28

$533
182

$351
Toy World, Inc.
Net Savings from Level Production

Jan. Feb. Mar. Apr. May


Net Profit (level production) -$116.50 -$107.56 -$102.68 -$108.74 -$111.97
Net Profit (seasonal production) -112 -$104.00 -$100.00 -$104.00 -$105.00
Net savings from shift to level production -$4.50 -$3.56 -$2.68 -$4.74 -$6.97
June July Aug. Sept. Oct. Nov. Dec. Total
-$114.94 -$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 521.09
-$105.00 -$101.00 $186.00 $225.00 $281.00 $310.00 $80.00 $351.00
-$9.94 -$12.49 $33.69 $42.22 $52.08 $60.61 $26.37 $170.09
Toy World, Inc.
Pro Forma Balance Sheets Under Level Production, 1994
(thousand of dollars)

Jan. Feb. Mar. Apr. May

Cash $620.11 $805.78 $200.00 $200.00 $200.00


Accounts receivable $1,060.00 $260.00 $300.00 $300.00 $280.00
Inventory $1,050.38 $1,501.74 $1,940.08 $2,391.44 $2,842.80
Current assets $2,730.49 $2,567.52 $2,440.08 $2,891.44 $3,322.80
Net plant and equipment $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00
Total assets $3,906.49 $3,743.52 $3,616.08 $4,067.44 $4,498.80

Accounts payable $250.00 $250.00 $250.00 $250.00 $250.00


Notes payable, bank $0.00 $0.00 $116.14 $767.26 $1,368.27
Accrued taxes $27.99 -$27.42 -$168.32 -$259.34 -$317.02
Long-term debt, current portion $50.00 $50.00 $50.00 $50.00 $50.00
Current liabilities $327.99 $272.58 $247.82 $807.92 $1,351.25
Long-term debt $400.00 $400.00 $400.00 $400.00 $400.00
Shareholders' equity $3,178.50 $3,070.94 $2,968.26 $2,859.52 $2,747.55
Total liabilities and equity $3,906.49 $3,743.52 $3,616.08 $4,067.44 $4,498.80
check $0.00 $0.00 $0.00 $0.00 $0.00

Notes:
Accounts receivable - Sales of the last two months
Net plant and equipment - Equal to depreciation expense
Accounts payable - 30% of sales ($3,000,000/12) = $250,000 per month
Notes payable - Balancing figure
Long-term debt (current portion) - $50
Long-term debt - $400 as of December 1993, with $25 being paid off ever
Shareholders' equity - Beginning equity + net income (loss) per month
June July Aug. Sept. Oct. Nov. Dec.

$200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00


$280.00 $300.00 $1,780.00 $3,460.00 $3,980.00 $4,425.00 $3,400.00
$3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 $586.00
$3,774.16 $4,232.50 $5,200.38 $6,225.04 $5,894.40 $5,394.37 $4,186.00
$1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00
$4,950.16 $5,408.50 $6,376.38 $7,401.04 $7,070.40 $6,570.37 $5,362.00

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00


$2,053.79 $2,684.08 $3,319.10 $3,973.88 $3,138.58 $2,077.01 $767.47
-$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 $128.44
$50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00
$1,942.56 $2,514.38 $3,262.58 $4,020.01 $3,356.30 $2,485.65 $1,195.91
$375.00 $375.00 $375.00 $375.00 $375.00 $375.00 $350.00
$2,632.61 $2,519.12 $2,738.80 $3,006.02 $3,339.10 $3,709.72 $3,816.09
$4,950.16 $5,408.50 $6,376.38 $7,401.04 $7,070.40 $6,570.37 $5,362.00
$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

tion expense
0/12) = $250,000 per month

, with $25 being paid off every June and December


t income (loss) per month
Toy World, Inc.
Pro Forma Income Statement Under Level Production, 1994
(thousands of dollars)

Jan. Feb. Mar. Apr. May June

Net sales $120.00 $140.00 $160.00 $140.00 $140.00 $140.00


Cost of goods sold $78.12 $91.14 $104.16 $91.14 $91.14 $91.14
Gross profit $41.88 $48.86 $55.84 $48.86 $48.86 $48.86
Operating expenses $209.58 $209.58 $209.58 $209.58 $209.58 $209.58
Interest expense $9.25 $3.61 $3.61 $4.48 $9.36 $13.87
Interest income $0.44 $1.36 $1.77 $0.44 $0.44 $0.44
Profit (loss) before taxes -$176.51 -$162.97 -$155.58 -$164.76 -$169.65 -$174.15
Income taxes -$60.01 -$55.41 -$52.90 -$56.02 -$57.68 -$59.21
Net Profit -$116.50 -$107.56 -$102.68 -$108.74 -$111.97 -$114.94

Notes:
Net sales - Estimated 1994 net sales per month
COGS - 65.1% of net sales per month
Operating expenses - $200*12 = $2,400 annually under seasonal production+ $ 1
Interest expense -
Interest income -
Income taxes - 34% of profit (loss) before taxes
July Aug. Sept. Oct. Nov. Dec. Total

$160.00 $1,620.00 $1,840.00 $2,140.00 $2,285.00 $1,115.00 ###


$104.16 $1,054.62 $1,197.84 $1,393.14 $1,487.54 $725.87 $6,510.00
$55.84 $565.38 $642.16 $746.86 $797.47 $389.14 $3,490.00
$209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $2,515.00
$18.65 $23.38 $28.14 $33.05 $26.79 $18.82 $193.01
$0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $7.54
-$171.95 $332.86 $404.88 $504.67 $561.54 $161.17 $789.53
-$58.46 $113.17 $137.66 $171.59 $190.92 $54.80 $268.44
-$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 $521.09

r seasonal production+ $ 115 additional storage/handling costs = $2,515 annually ($209.58 monthly)
8 monthly)
Toy World, Inc.
Cash Budget Under Level Productions, 1994
(thousands of dollars)

Jan. Feb. Mar.

Inflows
Collections $1,965.00 $940.00 $120.00
After-tax interest income $0.44 $1.36 $1.77
Total $1,965.44 $941.36 $121.77

Outflows
Payments of accounts payable $282.00 $250.00 $250.00
Tax payments $0.00 $0.00 $88.00
Repayment of long-term debt $0.00 $0.00 $0.00
Operating expenses $209.58 $209.58 $209.58
Interest expense $9.25 $3.61 $3.61
Wages $292.50 $292.50 $292.50
Total $793.33 $755.69 $843.69
Net inflow (outflow) $1,172.11 $185.67 -$721.92
Beginning cash $200.00 $620.11 $805.78
Ending cash before any loan increase or repayment $1,372.11 $805.78 $83.86
Loan availment $0.00 $0.00 $116.14
Loan repayment $752.00 $0.00 $0.00
End-of-month cash balance $620.11 $805.78 $200.00

Min cash balance $200.00

Loan balance, beg. $752.00 $0.00 $0.00


Availment (Repayment) $752.00 $0.00 -$116.14
Loan balance, end $0.00 $0.00 $116.14

Long-term debt
Balance, beg. $450.00 $450.00 $450.00
Repayment $0.00 $0.00 $0.00
Balance, end $450.00 $450.00 $450.00

Interest Expense
on long-term debt 9.625% $3.61 $3.61 $3.61
on notes payable 9.000% $5.64 $0.00 $0.00
$9.25 $3.61 $3.61

Interest income 4.00%


Apr. May June July Aug. Sept. Oct. Nov.

$140.00 $160.00 $140.00 $140.00 $140.00 $160.00 $1,620.00 $1,840.00


$0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44
$140.44 $160.44 $140.44 $140.44 $140.44 $160.44 $1,620.44 $1,840.44

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00


$35.00 $0.00 $35.00 $0.00 $0.00 $35.00 $0.00 $0.00
$0.00 $0.00 $3.34 $0.00 $0.00 $0.00 $0.00 $0.00
$209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $209.58
$4.48 $9.36 $13.87 $18.65 $23.38 $28.14 $33.05 $26.79
$292.50 $292.50 $292.50 $292.50 $292.50 $292.50 $292.50 $292.50
$791.56 $761.45 $804.30 $770.73 $775.46 $815.22 $785.13 $778.87
-$651.12 -$601.01 -$663.86 -$630.29 -$635.02 -$654.78 $835.31 $1,061.57
$200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00
-$451.12 -$401.01 -$463.86 -$430.29 -$435.02 -$454.78 $1,035.31 $1,261.57
$651.12 $601.01 $663.86 $630.29 $635.02 $654.78 $0.00 $0.00
$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $835.31 $1,061.57
$200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00

$116.14 $767.26 $1,368.27 $2,032.13 $2,662.42 $3,297.44 $3,952.23 $3,116.92


-$651.12 -$601.01 -$663.86 -$630.29 -$635.02 -$654.78 $835.31 $1,061.57
$767.26 $1,368.27 $2,032.13 $2,662.42 $3,297.44 $3,952.23 $3,116.92 $2,055.35

$450.00 $450.00 $450.00 $425.00 $425.00 $425.00 $425.00 $425.00


$0.00 $0.00 $25.00 $0.00 $0.00 $0.00 $0.00 $0.00
$450.00 $450.00 $425.00 $425.00 $425.00 $425.00 $425.00 $425.00

$3.61 $3.61 $3.61 $3.41 $3.41 $3.41 $3.41 $3.41


$0.87 $5.75 $10.26 $15.24 $19.97 $24.73 $29.64 $23.38
$4.48 $9.36 $13.87 $18.65 $23.38 $28.14 $33.05 $26.79
Dec. Total

$2,140.00 9,505
$0.44 8
$2,140.44 9,513

$250.00
$35.00
$4.55
$209.58
$18.82
$292.50
$810.45
$1,329.99
$200.00
$1,529.99
$0.00
$1,329.99
$200.00

200

$2,055.35
$1,329.99
$725.36

$425.00
$25.00
$400.00

$3.41
$15.42
$18.82
Toy World, Inc.
Schedule of Changes Affecting Inventory, 1994
(thousands of dollars)

Jan. Feb. Mar. Apr. May

Finished Goods, Beg. $586.00 $1,050.38 $1,501.74 $1,940.08 $2,391.44


Finished Goods Completed $542.50 $542.50 $542.50 $542.50 $542.50
Finished Goods Available for Sale$1,128.50 $1,592.88 $2,044.24 $2,482.58 $2,933.94
Cost of Goods Sold $78.12 $91.14 $104.16 $91.14 $91.14
Finished Goods, End. $1,050.38 $1,501.74 $1,940.08 $2,391.44 $2,842.80

Toy World, Inc.


Calculation of Accrued Taxes for 1994
(thousands of dollars)

Jan. Feb. Mar. Apr. May

Accrued Taxes, beg. $88.00 $27.99 -$27.42 -$168.32 -$259.34


Taxes Payable on Profits in Month -$60.01 -$55.41 -$52.90 -$56.02 -$57.68
Taxes Paid $0.00 $0.00 $88.00 $35.00 $0.00
Accrued Taxes, end $27.99 -$27.42 -$168.32 -$259.34 -$317.02

Notes:
Finished goods (completed) - COGS/12
Taxes paid - $88 (previous year's balance) on March, $35 on April, June, Sep
June July Aug. Sept. Oct. Nov. Dec. Total

$2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 ###


$542.50 $542.50 $542.50 $542.50 $542.50 $542.50 $542.50 $6,510.00
$3,385.30 $3,836.66 $4,275.00 $3,762.88 $3,107.54 $2,256.90 $1,311.87 ###
$91.14 $104.16 $1,054.62 $1,197.84 $1,393.14 $1,487.54 $725.87 $6,510.00
$3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 $586.00 ###

June July Aug. Sept. Oct. Nov. Dec. Total

-$317.02 -$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 ###


-$59.21 -$58.46 $113.17 $137.66 $171.59 $190.92 $54.80 $268.44
$35.00 $0.00 $0.00 $35.00 $0.00 $0.00 $35.00 $228.00
-$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 $128.44 ###

n March, $35 on April, June, September, and December

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