Question

Genesis Corp. is a traditional retailer that recently also started an Internet-based subsidiary that sells its product online. Its sales in September 2017 were $700,000. Tom Scott, the company president, is preparing for a meeting with Dan Harris, a loan officer with Mojito Bank, to review year 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 October 2017: $2,500,000, sales in November 2017: $3,500,000 and sales in December 2017: $2,750,000.

Genesis’ balance sheet as of the end of September, 2017 was as follows.

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Genesis Corporation                                                             

Balance Sheet as of September 30, 2017 (in $ Thousands)

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Cash                              $ 60                               Accounts payable         $   10                         

Accounts receivable         700                               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 September thus will be collected in October. The October sales will be collected in November, 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 80 percent of sales. Inventory is purchased in the month of sale and paid for in cash. Other cash expenses average 7 percent of sales. Depreciation is $10,000 per month. Assume taxes are paid monthly and the effective income tax rate is 40 percent for planning purposes.

      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 $80,000. 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 estimated based on last month’s debt.

Prepare monthly pro forma cash budgets for October, November, and December 2017.                        

                                                                                                                                 .

Prepare monthly pro forma income statements for October, November, and December 2017.                                                                                                                  .

Prepare monthly pro forma balance sheets at the end of October, November, and December 2017.                                                                                                  .

Use 2 decimals point in your reports.

Answer 1

Short term borrowing is the difference between : Desired Cash and Cash available for use after paying interest on previous month's outstanding