Question

Fraser Corp. is a traditional retailer that recently also started an Internet-based subsidiary that sells its product online. Its sales in June 2018 were $700,000. Fraser, the company president, is preparing for a meeting with Tom Scott, a loan officer with Anchor Bank, to review quarter end financing requirements. After discussions with the company’s marketing and finance managers, sales over the next three months were forecasted as follows. Sales in July 2018: $1,250,000, sales in August 2018: $2,250,000 and sales in September 2018: $2,500,000.

Fraser’s balance sheet as of the end of June, 2018 was as follows.

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Fraser Corporation                                                             

Balance Sheet as of June 30, 2018 (in $ Thousands)

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Cash                              $ 50                               Accounts payable         $   10                         

Accounts receivable         710                               Notes payable                  800

Inventories                       600                               Long-term debt                400

Net fixed assets               750                                  Total liabilities          1,210

                                                                                       Equity                           900

          Total assets          $2,110                                       Total                   $2,110

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All sales are made on credit terms of net 30 days and are collected the following month and no bad debts are anticipated. The accounts receivable on the balance sheet at the end of June thus will be collected in July. The July sales will be collected in August, and so on The amount of Inventory on hand represents the operating level which the company intends to maintain (i.e., not percentage of sales). Cost of goods sold average 70 percent of sales. Inventory is purchased in the month of sale and paid for in cash. Other cash expenses average 7 percent of sales. Assume taxes are paid monthly and the effective income tax rate is 40 percent for planning purposes. Fraser is planning to purchase a small warehouse in September 2018 for $100,000. Depreciation is $10,000 per month including depreciation expenses for the warehouse.

      The annual interest rate on outstanding long term debt and notes payable is 12% per annum. There are no capital expenditures planned during the period, and no dividends will be paid. The company’s desired end-of-month cash balance is $90,000. The president hopes to meet any cash shortages during the period by borrowing (short term) from the bank at the end of the month. The interest rate on the new bank loans will be 12% per annum. All interest expenses are based on previous month’s debt.

Prepare monthly pro forma cash budgets for July, August, and September 2018. (6 marks).

Prepare monthly pro forma income statements for July, August, and September 2018.

Prepare monthly pro forma balance sheets at the end of July, August, and September 2018. .

Answer 1

Cash Budget	Jul-18	Aug-18	Sep-18
Sales	1250000	2250000	2500000
Opening Cash	50000	90000	90000
Cash collected
On sales	700000	1250000	2250000
Borrowing short term	499900	807893	181561
Payments
Purchases	875000	1575000	1750000
Interest	144000	203988	300935
Tax	53400	121404.8	105626
Other Cash expenses	87500	157500	175000
Ware house cost			100000
Closing Balance	90000	90000	90000
Surplus/(Shortage)	-499900	-807893	-181561

Income Statement	Jul-18	Aug-18	Sep-18
Sales	1250000	2250000	2500000
Cost of goods sold	-875000	-1575000	-1750000
Interest	-144000	-203988	-300935
Other cash expenses	-87500	-157500	-175000
Depreciation	-10000	-10000	-10000
Profit	133500	303512	264065
Tax @40%	53400	121404.8	105626
Net Income	80100	182107.2	158439

Balance sheet	Jul-18	Aug-18	Sep-18
Assets
Net fixed assets	740000	730000	820000
Accounts receivable	1260000	2260000	2510000
Inventory	600000	600000	600000
cash	90000	90000	90000
Total Assets	2690000	3680000	4020000
Equity
Opening	900000	980100	1162207
Add:Net Income	80100	182107	158439
Closing Equity	980100	1162207	1320646
Accounts payable	10000	10000	10000
Notes payable	800000	800000	800000
Long term debt	400000	400000	400000
Short term debt	499900	1307793	1489354
Total Liabilities	2690000	3680000	4020000