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.

____________________________________________________________________

Genesis Corporation                                                             

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

____________________________________________________________________

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

     ____________________________________________________________________

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.

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

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

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

Answer 1

Sales Budget
	October	November	December	Total	Jan	Feb
Sales (dollars)	2500000	3500000	2750000	8750000	0	0
Since closing and opening equal, Total requirement	2500000	3500000	2750000	8750000
Cost of goods sold 80% i.e. purchases	2000000	2800000	2200000	7000000
1. Cash Budget
	October	November	December	Total	April
Sales Collections	700000	2500000	3500000	6700000	1650000
Disbursment:
Purchases	2000000	2800000	2200000	7000000
Other Cash Expenses 7% of sales	175000	245000	192500	612500
Interest Expense	12000	28282	35682	75964
Income Tax	121200	166687	124727	412615
-Total Disbursment	2308200	3239969	2552909	8101078
Change in Cash	-1608200	-739969	947091	-1401078
Beginning Balance	60000	80000	80000	60000
Ending Balance	-1548200	-659969	1027091	-1341078
Borrowing	1628200	739969	-947091	1421078
Ending Balance	80000	80000	80000	80000
2. Budgeted Income Statement
	October	November	December	Total
Sale	2500000	3500000	2750000	8750000
Cost of Goods Sold	2000000	2800000	2200000	7000000
Gross Profit	500000	700000	550000	1750000
Other Expenses-Cash	175000	245000	192500	612500
Depreciation	10000	10000	10000	30000
Net Income from operations	315000	445000	347500	1107500
Other Revenue and Expense:
Interest Expense 12*(800000+400000)*1/12-Old Loan	12000	12000	12000	36000
Interest Expense New Loan		16282	23682	39964
Net Income before tax	303000	416718	311818	1031536
Less: Income Tax 40%	121200	166687	124727	412615
Net Income	181800	250031	187091	618922
3. Proforma Balance sheet
Cash		80
Accounts Receivable		2750	Dec Sale
Inventories		600
Net Fixed Assets 750-30		720
Total Assets		4150
Accounts Payable		10
Note Payable		800
Long Term Debt		400
Borrowing-New		1421
Total Liabilities		2631
Equity		900
Retained Earning		619
Total Liabiliities and equity		4150