Question

Cary Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Sales for 2002 were $450 million. They are forecasted to increase to $500 million in 2003. Additional information and relevant financial ratios are given below:

Minimum cash balance required: $1.8 million

Average collection period (accounts receivable/sales/365): 60 days

Inventory turnover (COGS/inventory): 3.18

Net fixed assets: Current level of $216 million. The firm expects to acquire new plant and equipment worth $8 million in 2003.

Accounts payable: 4% annual sales

LT debt: existing LT debt is $110 million out of which the company expects to repay $15 million in 2003

Common stock: expected to remain constant at its 2002 level of $120 million.

COGS: 70% of sales

Depreciation: annual depreciation for 2003 expected to be $15 million

Net profit margin: 6% of projected sales in 2003

Dividends: expected to be 40% of net income.

Retained earnings at end of 2002: 130 million

1. Based on the information given above, forecast the income statement for year ended December 31, 2003
2. Based on the information given above, and your estimate of retained earnings  from part (a), forecast the pro forma balance sheet as of December 31, 2003. Assume that any additional funds requirement will be met by notes payable. The firm does not have any note payable at end of 2002.

Answer 1

(a.) Forecasted Income Statement for year ended 31st December 2003

. COGS = 70 % of Sales

Therefore COGS = 70% * 500 = $ 350 million

It is given that Inventory turnover ratio is 3.18

Inventory Turnover Ratio = COGS / Inventory

3.18 = 350 / Inventory

Inventory = 350/3.18

= $ 110.06 million

Here inventory of $ 110.06 million is to be treated as inventory as at the end of 31st Dec, 2003, because details of opening stock is not given.

FORECASTED INCOME STATEMENT FOR THE YEAR ENDED 31-12-2003
PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To   Cost of Goods Sold	35,00,00,000.00	By Sales	50,00,00,000.00
To     Gross Profit c/d	15,00,00,000.00
TOTAL	50,00,00,000.00	TOTAL	50,00,00,000.00
To      Depreciation	1,50,00,000.00	By Gross Profit b/d	15,00,00,000.00
To Other Expenses (B/f)
(150 million - 15 million - 30 million)	10,50,00,000.00
To Net Profit	3,00,00,000.00
TOTAL	15,00,00,000.00	TOTAL	15,00,00,000.00

Calculation of Income to be Transfered to Retained Earnings:

Net Profit	3,00,00,000.00
Less: Dividend
(40% of 3,00,00,000)	1,20,00,000.00
Balance Trf. To Retained Earning	1,80,00,000.00

Calculation of Retained Earnings at the end of Year:

Opening Balace of Retained Earnings	13,00,00,000.00
Add: Retained Earnings	1,80,00,000.00
Closing Balance	14,80,00,000.00

Fixed Assets at the end of year= Opening Balance + Additions - Depriciation

= 216+8-15

= $ 209 million

Average Collection Period = 60 days

Average Collection Period = 365/ A/R Turnover Ratio

60 = 365/ A/R Turnover Ratio

A/R Turnover Ratio = 365/60 = 6.08333

A/R Turnover Ratio = Credit Sale / Account Receivable

6.08333 = 500 / A/R

Account Receivable = $ 82.19 million

or

Average Collection Period * (Sales / 365) = Account Receivable

60 * (500/365) = Account Receivable

Account Receivable = 82.19 million

Here Receivable of $ 82.19 million is to be treated as Receivable as at the end of 31st Dec, 2003, because details of opening Receivables are not given.

(b)

FORECASTED BALANCE SHEET AS ON 31- 12-2003
LIABILITIES	AMOUNT	ASSETS	AMOUNT
	.
COMMON STOCK	12,00,00,000.00	FIXED ASSETS	20,90,00,000.00
RETAINED EARNINGS	14,80,00,000.00
		CURRENT ASSETS
Long Term Debt ($110-$15)	9,50,00,000.00
		Cash & Bank Balances:	18,00,000.00
CURRENT LIABILITIES:		Sundry Debtors:	8,21,90,000.00
		Closing Stock	11,00,60,000.00
Accounts Payable	2,00,00,000.00
Repayment of Long Term Debt in 2003	1,50,00,000.00
Notes Payable (B/F)	50,50,000.00
TOTAL	40,30,50,000.00	TOTAL	40,30,50,000.00