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.

____________________________________________________________________

Fraser Corporation                                                              

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

____________________________________________________________________

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 income statements for July, August, and September 2018.                                                                                                                                        

                                                                                                                                        .

Answer 1

Budgeted Income Statement
	July	August	September	Total
Sale	$12,50,000	$22,50,000	$25,00,000	$60,00,000
Less: Cost of Goods Sold ( 70% of Sales)	$8,75,000	$15,75,000	$17,50,000	$42,00,000
Gross Profit	$3,75,000	$6,75,000	$7,50,000	$18,00,000
Less: Other Expenses-Cash (7% of Sales)	$87,500	$1,57,500	$1,75,000	$4,20,000
Less: Depreciation	$10,000	$10,000	$10,000	$30,000
Net Income from operations	$2,77,500	$5,07,500	$5,65,000	$13,50,000
Other Revenue and Expense:
Interest Expense 12*(800000+400000)*1/12-Old Loan	$12,000	$12,000	$12,000	$36,000
Interest Expense New Loan		$4,107	$11,059	$15,166
Net Income before tax	$2,65,500	$4,91,393	$3,11,818	$10,68,711
Less: Income Tax 40%	$1,06,200	$1,96,557	$1,24,727	$4,27,484
Net Income	$1,59,300	$2,94,836	$1,87,091	$6,41,227

Working Note for Computaation of Interest expense
	July	August	September	June
Sales Made	$12,50,000	$22,50,000	$25,00,000	$7,10,000
Sales Collections	$7,10,000	$12,50,000	$22,50,000
Disbursment:
Purchases	$8,75,000	$15,75,000	$17,50,000
Other Cash Expenses 7% of sales	$87,500	$1,57,500	$1,75,000
Interest Expense	$12,000	$16,107	$23,059
Income Tax	$1,06,200	$1,96,557	$1,24,727
-Total Disbursment	$10,80,700	$19,45,164	$20,72,786
Change in Cash	-$3,70,700	-$6,95,164	$1,77,214
Beginning Balance	$50,000	$90,000	$90,000
Ending Balance	-$3,20,700	-$6,05,164	$2,67,214
Borrowing	$4,10,700	$6,95,164	$1,77,214
Ending Balance	$90,000	$90,000	$90,000
* 410700*1%=4107
**695164*1%=6951.6