Question

Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows:

End of the year information:

Account	12/31/17 Ending Balance
Cash	50,000
Accounts Receivable	175,000
Inventory	126,000
Equipment	480,000
Accumulated Depreciation	90,000
Accounts Payable	156,000
Short-term Notes Payable	12,000
Long-term Notes Payable	200,000
Common Stock	235,000
Retained Earnings	solve

Additional Information:

• Sales for December total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $25 per unit.
• Company policy calls for a given month’s ending inventory to equal 80% of the next month’s expected unit sales. The December 31 2017 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit.
• Sales representatives’ commissions are 12.5% of sales and are paid in the month of the sales. The sales manager’s monthly salary will be $3,500 in January and $4,000 per month thereafter.
• Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable.
• The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of sale).
• All merchandise purchases are on credit, and no payables arise from any other transactions. One month’s purchases are fully paid in the next month.
• The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
• Dividends of $100,000 are to be declared and paid in February.
• No cash payments for income taxes are to be made during the first calendar quarter. Income taxes will be assessed at 35% in the quarter.
• Equipment purchases of $55,000 are scheduled for March.

Part A:

• Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 may be prepared.
• Expected cash receipts from customers and the expected March 31 balance of accounts receivable.
• Expected cash payments for purchases and the expected March 31 balance of accounts payable.
• Cash budget.
• Budgeted income statement.
• Budgeted statement of retained earnings.
• Budgeted balance sheet.

Answer 1

answer to a	Balance sheet of 2018
	Accounts Payable 156,000	156000	Accounts Receivable 175,000	175000
	Short-term Notes Payable 12,000	12000	Inventory 126,00	12600
	Long-term Notes Payable 200,000	200000	Equipment 480,000	390000
	Common Stock 235,000	235000	cash	50000
	retained earnings	24600
	total	627600	total	627600
	budgeted sales	December	Jan	feb	march	April	total
	no of units	10000	10500	11025	11576.25	12155.063
	rate	25	262500	275625	289406.25	303876.56	827531.3
									cash budget
	opening inventory	8000	8400	8820	9261	9724.05			Jan	feb	mar	April
	value of opening inventory	126000	132300	138915	145860.75		opening cash balance	50000	84517.5	50000
								cash sales	78750	82687.5	86821.88
	closing inventory	8400	8820	9261	9724.05			credit sales	175000	183750	192937.5	202584.4
		126000	132300	138915	145860.75			less purchases	156000	163800	171990	180589.5
								sales person commisson	32812.5	34453.13	36175.78
	no of units purchased	10400	10920	11466	12039.3	2431.0125		salary	3500	4000	4000
	value of unit purchased	156000	163800	171990	180589.5			general and administrative expense	14800	14800	14800
								dividend		100000
	cost of good sold	157500	165375	173643.75		496518.8	equipment purchased		55000
								short term note interest 1%	120		160.981	280.981
	sales expenses
	sales person commission	32812.5	34453.125	36175.781		103441.4	net cash available	96517.5	33901.88	47632.61
	salesman salary	3500	4000	4000		11500	minimum cash balance	50000	50000	50000
								Excess cash balance or shortage of cash	46517.5	16098.13	2367.387
	general and administrative expense	14800	14800	14800		44400	payment of short term notes or short term notes	12000	16098.13	2367.387	18465.51
		8000						closing balance of cash	84517.5	50000	50000
		5000
		1800
	payment of interest on short notes				280.981
	income tax						60084.88
	net profit after tax					111305.2
	dividend			100000			100000
	profit transferedto retained earnings				11305.23
	retained earning opening balance	24600
	balance transferred from quarter net profit	11305.2299
	total			35905.2299
	Balance sheet of 2015
	Accounts Payable 156,000	180589.5	Accounts Receivable 175,000	202584.375
	Short-term Notes Payable 12,000	18465.512	Inventory 126,00	145860.75
	Long-term Notes Payable 200,000	200000	Equipment 480,000	425000
	Common Stock 235,000	235000	cash	50000
	retained earnings	35905.23
	total	669960.24	total	823445.125