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

     ____________________________________________________________________

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 balance sheets at the end of July, August, and September 2018.                                                                                                                

                                                                                                                                         .

Answer 1

(Fig.in '000s)
Sales Budget
	Jul-18	Aug.2018	Sep.2018	Total
Sales budgeted	1250	2250	2500	6000
Sales collections	710	1250	2250	4210
Accounts Recivables	1250	2250	2500
Purchase budget
COGS(70%*sales)	875	1575	1750	4200
Desired ending inventory	600	600	600	600
Total needed	1475	2175	2350	4800
Less: Beginning inv. Avail.	600	600	600	600
Purchases reqd.	875	1575	1750	4200
Payment for purchases	875	1575	1750	4200
Cash Budget
Beginning balance	50	90	90	50
Add: sales collections	710	1250	2250	4210
Total cash available	760	1340	2340	4260
Less: Payments for:
Purchases	875	1575	1750	4200
Other cash expenses	87.5	157.5	175	420
Int. exp.on LT&N/P(12%*(800+400)/12)	12	12	12	36
Income tax	106.2	196.56	216.78	519.54
Warehouse			100	100
Total payments	1080.7	1941.06	2253.78	5275.54
Surplus/Deficit	-320.7	-601.06	86.22	-1015.54
Add:Bank loan recd.	410.7	695.17	14.84	1120.71
Less: Loan repaid				0
Less: Interest		4.11	11.06	15.17
Ending Balance	90	90	90.00	90.00

Note: Int. on ST Bank Loans:

410.7*1%=4.11

(410.7+695.17)*1%=11.06

Income statement
	Jul-18	Aug.2018	Sep.2018	Total
Sales budgeted	1250	2250	2500	6000
Less:COGS(70%*sales)	875	1575	1750	4200
Gross profit	375	675	750	1800
Less: Expenses:
Cash expenses(7%*sales)	87.5	157.5	175	420
Depreciation	10	10	10	30
Int. exp.on LT&N/P(12%*(800+400)/12)	12	12	12	36
Int. On ST loan from bank		4.11	11.06	15.17
EBT	265.5	491.39	541.94	1298.83
Less: Tax at 40%	106.2	196.56	216.78	519.53
EAT	159.3	294.84	325.16	779.30

Monthly Proforma Balance sheet
(Fig. in '000s rounded)	Jul-18	Aug.2018	Sep.2018
Assets
Cash	90	90	90
Accounts Receivables	1250	2250	2500
Inventories	600	600	600
Net fixed assets	740	730	820
Total assets	2680	3670	4010
Liabilities
Accounts payable	10	10	10
ST bank loans	411	1106	1121
Notes payable	800	800	800
Long-term debt	400	400	400
Total Liabilities	1621	2316	2331
Equity	900	900	900
Retained Earnings	159	454	779
Total equity	1059	1354	1679
Total Liabilities & Equity	2680	3670	4010