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.

ABC Company’s management is also considering 3 new projects consisting of the purchase of new equipment. The company has limited resources, and may not be able to complete make all 3 purchases. The information is as follows for the purchases below.

	Project 1	Project 2	Project 3
Purchase Price	$80,000	$175,000	$22,700
Required Rate of Return	6%	8%	12%
Time Period	3 years	5 years	2 years
Cash Flows – Year 1	$48,000	$85,000	$13,000
Cash Flows – Year 2	$36,000	$74,000	$13,000
Cash Flows – Year 3	$22,000	$38,000	N/A
Cash Flows – Year 4	N/A	$26,800	N/A
Cash Flows – Year 5	N/A	$19,000	N/A

How to?

• Prepare the year-end balance sheet for 2017. Be sure to use proper headings.
• Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 may be prepared.

• Sales budget, including budgeted sales for April.
• Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the March 31 budgeted inventory.
• Selling expense budget.
• General and administrative expense budget.
• 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

Balance Sheet as at the end of Dec.31,2017
Assets
Current assets
Cash	50,000
Accounts Receivable	175,000
Inventory	126,000
Total Current assets		351,000
Fixed assets:
Equipment	480,000
Less:Accumulated Depreciation	90,000	390,000
Total Assets		741,000
Liabilities & SH .Equity
Current Liabilities
Accounts Payable	156,000
Short-term Notes Payable	12,000
Total current liabilities		168,000
Long-term Liabilities
Long-term Notes Payable	200,000
Total Long-term Liabilities		200000
Total Liabilities		368,000
Sh. Equity
Common Stock	235,000
Retained Earnings(Bal.fig.)	138,000
Total Sh. Equity		373,000
Total Liabilities & SH .Equity		741000

Sales Budget	Jan.	Feb.	Mar.	Quarter	April
In units	10500	11025	11576	33101	12155
S.P./unit in $	25	25	25	25	25
Budgeted sales $	262500	275625	289406	827531

Purchases budget
Budgeted Sales in units	10500	11025	11576	33101	12155
Add:Ending inventory reqd.(80%*next mth sales)	8820	9261	9724	9724
Total units needed	19320	20286	21300	42825
Less: Beginning inventory	8400	8820	9261	8400
Budgeted Purchases( units)	10920	11466	12039	34425
Purchase price/unit	15	15	15	15
Budgeted purchases ($)	163800	171990	180590	516380

COGS Budget
Budgeted Sales in units	10500	11025	11576	33101
COGS at $ 15/unit	157500	165375	173644	496519
Cost of Mar 31, ending inventory			145860
9724*15

Selling expense Budget
Budgeted sales $	262500	275625	289406	827531
Sales Rep. commn at 12.5%*Sales $	32813	34453	36176	103441
Sales mgr. salary	3500	4000	4000	11500
Total sell.exp. Budgeted	36313	38453	40176	114941

General and administrative expense budget
Administrative salaries	8000	8000	8000	24000
Interest exp.(0.9%*200000)	1800	1800	1800	5400
Total cash G&A exp.	9800	9800	9800	29400
Depreciation	5000	5000	5000	15000
Total G&A exp.	14800	14800	14800	44400
Without interest exp.(for I/S)				39000

Expected cash receipts from customers
Budgeted sales $	262500	275625	289406	827531
Cash sales (30%)	78750	82688	86822	248259
Credit sales of:
Dec-17	175000			175000
Jan-18		183750		183750
Feb-18			192938	192938
Total sales collections expected	253750	266438	279759	799947
Exp.March 31 balance of accounts receivable			202584
(289406*70%)

Budgeted purchases ($)	163800	171990	180590	516380
Payment for purchases of:
Dec-17	156000			156000
Jan-18		163800		163800
Feb-18			171990	171990
Total pmt. For purchases	156000	163800	171990	491790
Exp. March 31 balance of accounts payable.			180590

Cash Budget
Beginning balance	50000	89518	50000	50000
Total sales collections exp.	253750	266438	279759	799947
Total cash available	303750	355955	329759	849947
Less: Disbursements:
Total pmt. For purchases	156000	163800	171990	491790
Total sell.exp. Budgeted	36313	38453	40176	114941
Total cash G&A exp.	9800	9800	9800	29400
Dividends		100000		100000
Equipment purchase			55000	55000
Total disbursements	202113	312053	276966	791131
Surplus/(Deficit)	101638	43902	52793	58815
Add: Borrowings		6098		6098
Less: Repayments	12000		2732	14732
Less: Interest	120		61	181
Ending balance	89518	50000	50000	50000

Budgeted Income Statement
Sales revenue		827531
Less: COGS		496519
Gross profit		331012
Less: Operating expenses
Selling expenses	114941
G&A exp.	39000	153941
Operating Income		177071
Less: Interest exp.
Int. on Long-term notes	5400
Int. on short-term notes	181	5581
Income before tax		171490
Less: Income Tax at 35%(171490*35%)		60021
Net Income		111468

Budgeted Statement of ret. earnings
Beginning balance	138000
Add:Net income for the qtr.	111468
Less: Cash dividends	100000
Ending balance	149468

Budgeted Balance Sheet
Assets
Current assets
Cash	50,000
Accounts Receivable	202,584
Inventory	145,860
Total Current assets		398,444
Fixed assets:
Equipment(480000+55000)	535,000
Less:Accumulated Depreciation(90000+15000)	105,000	430,000
Total Assets		828,444
Liabilities & SH .Equity
Current Liabilities
Accounts Payable	180,590
Income tax payable	60,021
Short-term Notes Payable	3,366
Total current liabilities		243,977
Long-term Liabilities
Long-term Notes Payable	200,000
Total Long-term Liabilities		200000
Total Liabilities		443,977
Sh. Equity
Common Stock	235,000
Retained Earnings(Bal.fig.)	149,468
Total Sh. Equity		384,468
Liabilities & SH .Equity		828,445