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 $710,000. 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.

                                                                                                                                        .

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

		PRO FORMA INCOME STATEMENT
			July	August	September
	A	Sales	$1,250,000	$2,250,000	$2,500,000
	B=0.7*A	Cost of goods sold	$875,000	$1,575,000	$1,750,000
	C=A-B	Gross Profit	$375,000	$675,000	$750,000
	D=0.07*A	Operating expenses	$87,500	$157,500	$175,000
	E=C-D	Earning Before Interest, Taxes and depreciation	$287,500	$517,500	$575,000
	F	Depreciation expense	$10,000	$10,000	$10,000
	G=E-F	Earning Before Interest&Taxes (EBIT)	$277,500	$507,500	$565,000
	H=0.12*(400000/12)	Interest on Long term debt	$4,000	$4,000	$4,000
	I	Interest on Bank Loan		$4,019	$10,842
	J=G-H-I	Income BeforeTaxes	$273,500	$499,481	$550,158
	K=J*0.4	Tax payment	$109,400	$199,792	$220,063
	L=J-K	Net Income	$164,100	$299,689	$330,095
		PRO FORMA CASH BUDGET
	M	Cash Collection from credit sales	$710,000	$1,250,000	$2,250,000
	N	Beginning Cash balance	$50,000	$90,000	$90,000
	P=M+N	Totalcash available	$760,000	$1,340,000	$2,340,000
		Cash Payment:
	B	Purchase of inventory	$875,000	$1,575,000	$1,750,000
	D	Other expenses	$87,500	$157,500	$175,000
	Q	Purchase of warehouse			$100,000
	K	Income tax payment	$109,400	$199,792	$220,063
	R=B+D+Q+K	TotalCash payment	$1,071,900	$1,932,292	$2,245,063
	S=P-R	Excess/(shortage)of Cash	($311,900)	($592,292)	$94,937
	T	Minimum cash balance required	$90,000	$90,000	$90,000
	U=T-S	Amount of BankLoan	$401,900	$682,292	$0
	V	Interest on Bank Loan		$4,019	$10,842
	X	End of month cash balance	$90,000	$90,000	$94,937
		PRO FORMA BALANCE SHEET
		Cash	$90,000	$90,000
		Account Receivable	$1,250,000	$2,250,000
		Inventories	$600,000	$600,000
		Net Fixed Assets	$740,000	$730,000
		Total Assets	$2,680,000	$3,670,000
		Acconts payable	$10,000	$10,000
		Interest payable on long termloan	$4,000	$8,000
		Interest payable on Bank Loan	$0	$4,019
		Notes Payable	$800,000	$800,000
		Long TermDebt	$400,000	$400,000
		BankLoan	$401,900	$1,084,192
		Total Liabilities	$1,615,900	$2,306,211
		Equity	$900,000	$900,000
		Retained Earnings	$164,100	$463,789
		Total	$2,680,000	$3,670,000