Table A

Table A: Condensed Income Statements, 1991-1993 (thousands of dollars)

1991 1992 1993

Net sales $5,213 $6,167 $7,967

Cost of goods sold 3,597 4,440 5,577
Gross profit $1,616 $1,727 $2,390
Operating expenses 1,199 1,542 1,912
Interest expense 68 75 85
Interest income 20 15 16
Profit before taxes $369 $125 $409
Federal income taxes 125 43 139
Net profit $244 $82 $270

Page 1
 Table B

Table B: Balance Sheet at December 31, 1993 (thousands of dollars)

Cash $200
Accounts receivable 2,905
Inventory 586
Current assets $3,691
Plant and equipment, net 1,176
Total assets $4,867

Accounts payable $282

Notes payable, bank 752
Accrued taxes(a) 88
Long-term debt, current portion 50
Current liabilities $1,172
Long-term debt 400
Shareholders' equity 3,295
Total liabilities and
shareholders' equity $4,867

(a)The company was required to make estimated tax payments on the 15th of April, June, September,
and December. In 1993 it elected to base its estimated tax payments on the previous year's tax. The
balance of $88,000 was due on March 15, 1994.

Page 2
 Table B

l, June, September,
ous year's tax. The

Page 3
 Table C

Table C: Monthly Sales Data (thousands of dollars)

Sales Total Jan Feb Mar Apr

1993 Actual $7,967 $64 88 96 88
1994 Projected $10,000 $120 140 160 140

Page 4
 Table C

May Jun Jul Aug Sep Oct

87 95 96 1,251 1,474 1,723
140 140 160 1,620 1,840 2,140

Page 5
 Table C

Nov Dec
1,965 940
2,285 1,115

Page 6
 Exhibit 1

Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollar

Actual
Dec. 31,
Note 1993 Jan. Feb. Mar.

Cash (a) $200 $878 $1,526 $1,253

Accounts receivable (b) 2,905 1,060 260 300
Inventory (c) 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139

Net plant and
equipment (d) 1,176 1,176 1,176 1,176

Total assets $4,867 $3,700 $3,548 $3,315

Accounts payable (e) $282 $36 $42 $48

Notes payable, bank (f) 752 0 0 0
Accrued taxes (g) 88 31 (23) (162)
Long-term debt, current portion 50 50 50 50

Current liabilities $1,172 $117 $69 ($64)

Long-term debt (h) 400 400 400 400
Shareholders' equity 3,295 3,183 3,079 2,979

Total liabilities
and equity $4,867 $3,700 $3,548 $3,315

Notes:
(a)Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out

(b)Assumed 60-day collection period.

(c)Assumed inventories maintained at December 31, 1993 level for all of 1994.

(d)Assumed equipment purchases equal to depreciation expense.

(e)Assumed equal to 30% of the current month's sales and related to material purchases of $3,000,000 for 199
This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal productio

(f)Plug figure.

(g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and Decem
each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the option

Page 7
 Exhibit 1

($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company could
Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, Septemb

(h)To be repaid at the rate of $25,000 each June and December.

Page 8
 Exhibit 1

n, 1994 (thousands of dollars)

Apr. May June July Aug. Sept.

$1,054 $915 $696 $527 $200 $200

300 280 280 300 1,780 3,460
586 586 586 586 586 586

$1,940 $1,781 $1,562 $1,413 $2,566 $4,246

1,176 1,176 1,176 1,176 1,176 1,176

$3,116 $2,957 $2,738 $2,589 $3,742 $5,422

$42 $42 $42 $48 $486 $552

0 0 0 0 433 1,741
(251) (305) (394) (448) (352) (271)
50 50 50 50 50 50

($159) ($213) ($302) ($350) $617 $2,072

400 400 375 375 375 375
2,875 2,770 2,665 2,564 2,750 2,975

$3,116 $2,957 $2,738 $2,589 $3,742 $5,422

months when company is out of debt.

hases of $3,000,000 for 1994 as against sales of $10 million.

ll follow seasonal production

, September 15, and December 15, 1994, payments of 25%

he company has the option of using the prior year's tax liability

Page 9
 Exhibit 1

atively, the company could estimate its 1994 tax liability directly.
000 in April, June, September, and December.

Page 10
 Exhibit 1

Oct. Nov. Dec.

$200 $200 $200

3,980 4,425 3,400
586 586 586

$4,766 $5,211 $4,186

1,176 1,176 1,176

$5,942 $6,387 $5,362

$642 $686 $334

1,745 1,677 942
(126) 33 40
50 50 50

$2,311 $2,446 $1,366

375 375 350
3,256 3,566 3,646

$5,942 $6,387 $5,362

Page 11
 Exhibit 2

Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr.

Net sales $120 $140 $160 $140

Cost of goods sold(a) 84 98 112 98

Gross profit $36 $42 $48 $42

Operating expenses(b) 200 200 200 200

Interest expense 7 4 4 4
Interest income(c) 2 4 5 4

Profit (loss) before taxes ($169) ($158) ($151) ($158)

Income taxes(d) (57) (54) (51) (54)

Net Profit ($112) ($104) ($100) ($104)

(a)Assumed cost of goods sold equal to 70% sales.

(b)Assumed to be same for each month throughout the year.

(c)Toy World expected to earn a 4% annualized rate of return on average monthly cash balances.

(d)Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet.

Page 12
 Exhibit 2

94 (thousands of dollars)

May June July Aug. Sept. Oct.

$140 $140 $160 $1,620 $1,840 $2,140

98 98 112 1,134 1,288 1,498

$42 $42 $48 $486 $552 $642

200 200 200 200 200 200

4 4 3 5 12 17
3 3 2 1 1 1

($159) ($159) ($153) $282 $341 $426

(54) (54) (52) 96 116 145

($105) ($105) ($101) $186 $225 $281

monthly cash balances.

ued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.

Page 13
 Exhibit 2

Nov. Dec. Total

$2,285 $1,115 $10,000

1,600 780 7,000

$685 $335 $3,000

200 200 2,400

17 14 95
1 1 28

$469 $122 $533

159 42 182

$310 $80 $351

Page 14
Net Savings from Level Production

Jan. Feb. Mar. Apr.

Net Profit (level production) -$116.50 -$107.56 -$102.68 -$108.74
Net Profit (seasonal production) -112 -$104.00 -$100.00 -$104.00
Net savings -$4.50 -$3.56 -$2.68 -$4.74
 May June July Aug. Sept. Oct. Nov. Dec. Total
-$111.97 -$114.94 -$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 521.0873
-$105.00 -$105.00 -$101.00 $186.00 $225.00 $281.00 $310.00 $80.00 $351.00
-$6.97 -$9.94 -$12.49 $33.69 $42.22 $52.08 $60.61 $26.37 $170.09
 Pro Forma Income Stateme
Jan. Feb. Mar.

Net sales $120.00 $140.00 $160.00

Cost of goods sold $78.12 $91.14 $104.16
Gross profit $41.88 $48.86 $55.84
Operating expenses $209.58 $209.58 $209.58
Interest expense $9.25 $3.61 $3.61
Interest income $0.44 $1.36 $1.77
Profit (loss) before taxes -$176.51 -$162.97 -$155.58
Income taxes -$60.01 -$55.41 -$52.90
Net Profit -$116.50 -$107.56 -$102.68

Pro Forma Balance Sheets

Jan. Feb. Mar.

Cash $620.11 $805.78 $200.00

Accounts receivable $1,060.00 $260.00 $300.00
Inventory $1,050.38 $1,501.74 $1,940.08
Current assets $2,730.49 $2,567.52 $2,440.08
Net plant and equipment $1,176.00 $1,176.00 $1,176.00
Total assets $3,906.49 $3,743.52 $3,616.08

Accounts payable $250.00 $250.00 $250.00

Notes payable, bank $0.00 $0.00 $116.14
Accrued taxes $27.99 -$27.42 -$168.32
Long-term debt, current portion $50.00 $50.00 $50.00
Current liabilities $327.99 $272.58 $247.82
Long-term debt $400.00 $400.00 $400.00
Shareholders' equity $3,178.50 $3,070.94 $2,968.26
Total liabilities and equity $3,906.49 $3,743.52 $3,616.08

Cash budget Unde

Jan. Feb.

Inflows
Collections from debtor $1,965.00 $940.00
interest income $0.44 $1.36
Total $1,965.44 $941.36

Outflows
Payments of accounts payable $282.00 $250.00
Tax payments $0.00 $0.00
Repayment of long-term debt $0.00 $0.00
Operating expenses $209.58 $209.58
Interest expense $9.25 $3.61
Wages $292.50 $292.50
Total $793.33 $755.69
Net inflow (outflow) $1,172.11 $185.67
Beginning cash $200.00 $620.11
Ending cash before any loan increase or repayment $1,372.11 $805.78
Loan availment $0.00 $0.00
Loan repayment $752.00 $0.00
End-of-month cash balance $620.11 $805.78

Min cash balance $200.00

Loan balance, beg. $752.00 $0.00

Availment (Repayment) $752.00 $0.00
Loan balance, end $0.00 $0.00

Long-term debt
Balance, beg. $450.00 $450.00
Repayment $0.00 $0.00
Balance, end $450.00 $450.00

Interest Expense
on long-term debt 9.625% $3.61 $3.61
on notes payable 9.000% $5.64 $0.00
$9.25 $3.61

Jan. Feb. Mar.

Finished Goods, Beg. $586.00 $1,050.38 $1,501.74

Finished Goods Completed $542.50 $542.50 $542.50
Finished Goods Available for Sale $1,128.50 $1,592.88 $2,044.24
Cost of Goods Sold $78.12 $91.14 $104.16
Finished Goods, End. $1,050.38 $1,501.74 $1,940.08

Jan. Feb. Mar.

Accrued Taxes, beg. $88.00 $27.99 -$27.42

Taxes Payable on Profits in Month -$60.01 -$55.41 -$52.90
Taxes Paid $0.00 $0.00 $88.00
Accrued Taxes, end $27.99 -$27.42 -$168.32
note:
Finished goods (completed) - COGS/12
Taxes paid - $88 (previous year's balance) on March, $35 on April, June, September, and December
Forma Income Statement Under level Production, 1994 (thousands of dollars)
Apr. May June July Aug. Sept.

$140.00 $140.00 $140.00 $160.00 $1,620.00 $1,840.00

$91.14 $91.14 $91.14 $104.16 $1,054.62 $1,197.84
$48.86 $48.86 $48.86 $55.84 $565.38 $642.16
$209.58 $209.58 $209.58 $209.58 $209.58 $209.58
$4.48 $9.36 $13.87 $18.65 $23.38 $28.14
$0.44 $0.44 $0.44 $0.44 $0.44 $0.44
-$164.76 -$169.65 -$174.15 -$171.95 $332.86 $404.88
-$56.02 -$57.68 -$59.21 -$58.46 $113.17 $137.66
-$108.74 -$111.97 -$114.94 -$113.49 $219.69 $267.22

o Forma Balance Sheets Under level Production, 1994 (thousands of dollars)

Apr. May June July Aug. Sept.

$200.00 $200.00 $200.00 $200.00 $200.00 $200.00

$300.00 $280.00 $280.00 $300.00 $1,780.00 $3,460.00
$2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04
$2,891.44 $3,322.80 $3,774.16 $4,232.50 $5,200.38 $6,225.04
$1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00
$4,067.44 $4,498.80 $4,950.16 $5,408.50 $6,376.38 $7,401.04

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00

$767.26 $1,368.27 $2,053.79 $2,684.08 $3,319.10 $3,973.88
-$259.34 -$317.02 -$411.23 -$469.70 -$356.52 -$253.87
$50.00 $50.00 $50.00 $50.00 $50.00 $50.00
$807.92 $1,351.25 $1,942.56 $2,514.38 $3,262.58 $4,020.01
$400.00 $400.00 $375.00 $375.00 $375.00 $375.00
$2,859.52 $2,747.55 $2,632.61 $2,519.12 $2,738.80 $3,006.02
$4,067.44 $4,498.80 $4,950.16 $5,408.50 $6,376.38 $7,401.04

Cash budget Under level Production, 1994 (thousands of dollars)

Mar. Apr. May June July Aug.

$120.00 $140.00 $160.00 $140.00 $140.00 $140.00

$1.77 $0.44 $0.44 $0.44 $0.44 $0.44
$121.77 $140.44 $160.44 $140.44 $140.44 $140.44

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00

$88.00 $35.00 $0.00 $35.00 $0.00 $0.00
$0.00 $0.00 $0.00 $3.34 $0.00 $0.00
$209.58 $209.58 $209.58 $209.58 $209.58 $209.58
$3.61 $4.48 $9.36 $13.87 $18.65 $23.38
$292.50 $292.50 $292.50 $292.50 $292.50 $292.50
$843.69 $791.56 $761.45 $804.30 $770.73 $775.46
-$721.92 -$651.12 -$601.01 -$663.86 -$630.29 -$635.02
 $805.78 $200.00 $200.00 $200.00 $200.00 $200.00
$83.86 -$451.12 -$401.01 -$463.86 -$430.29 -$435.02
$116.14 $651.12 $601.01 $663.86 $630.29 $635.02
$0.00 $0.00 $0.00 $0.00 $0.00 $0.00
$200.00 $200.00 $200.00 $200.00 $200.00 $200.00

$0.00 $116.14 $767.26 $1,368.27 $2,032.13 $2,662.42

-$116.14 -$651.12 -$601.01 -$663.86 -$630.29 -$635.02
$116.14 $767.26 $1,368.27 $2,032.13 $2,662.42 $3,297.44

$450.00 $450.00 $450.00 $450.00 $425.00 $425.00

$0.00 $0.00 $0.00 $25.00 $0.00 $0.00
$450.00 $450.00 $450.00 $425.00 $425.00 $425.00

$3.61 $3.61 $3.61 $3.61 $3.41 $3.41

$0.00 $0.87 $5.75 $10.26 $15.24 $19.97
$3.61 $4.48 $9.36 $13.87 $18.65 $23.38

Apr. May June July Aug. Sept.

$1,940.08 $2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38

$542.50 $542.50 $542.50 $542.50 $542.50 $542.50
$2,482.58 $2,933.94 $3,385.30 $3,836.66 $4,275.00 $3,762.88
$91.14 $91.14 $91.14 $104.16 $1,054.62 $1,197.84
$2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04

Apr. May June July Aug. Sept.

-$168.32 -$259.34 -$317.02 -$411.23 -$469.70 -$356.52

-$56.02 -$57.68 -$59.21 -$58.46 $113.17 $137.66
$35.00 $0.00 $35.00 $0.00 $0.00 $35.00
-$259.34 -$317.02 -$411.23 -$469.70 -$356.52 -$253.87

d December
Oct. Nov. Dec. Total

$2,140.00 $2,285.00 $1,115.00 $10,000.00 Net sales - Estimated 1994 net sales per month
$1,393.14 $1,487.54 $725.87 $6,510.00 COGS - 65.1% of net sales per month
$746.86 $797.47 $389.14 $3,490.00
$209.58 $209.58 $209.58 $2,515.00 Operating expenses - $200*12 = $2,400 annually u
$33.05 $26.79 $18.82 $193.01
$0.44 $0.44 $0.44 $7.54
$504.67 $561.54 $161.17 $789.53
$171.59 $190.92 $54.80 $268.44 Income taxes - 34% of profit (loss) before taxes
$333.08 $370.61 $106.37 $521.09

Oct. Nov. Dec.

$200.00 $200.00 $200.00

$3,980.00 $4,425.00 $3,400.00 Accounts receivable - Sales of the last two months
$1,714.40 $769.37 $586.00
$5,894.40 $5,394.37 $4,186.00
$1,176.00 $1,176.00 $1,176.00 Net plant and equipment - Equal to depreciation expense
$7,070.40 $6,570.37 $5,362.00

$250.00 $250.00 $250.00 Accounts payable - 30% of sales ($3,000,000/12) = $250,000 per
$3,138.58 $2,077.01 $767.47 Notes payable - Balancing figure
-$82.28 $108.64 $128.44
$50.00 $50.00 $50.00 Long-term debt (current portion) - $50
$3,356.30 $2,485.65 $1,195.91
$375.00 $375.00 $350.00 Long-term debt - $400 as of December 1993, with $25 being paid
$3,339.10 $3,709.72 $3,816.09 Shareholders' equity - Beginning equity + net income (loss) per m
$7,070.40 $6,570.37 $5,362.00

Sept. Oct. Nov. Dec. Total

$160.00 $1,620.00 $1,840.00 $2,140.00 $ 9,505

$0.44 $0.44 $0.44 $0.44 $ 8
$160.44 $1,620.44 $1,840.44 $2,140.44 $ 9,513

$250.00 $250.00 $250.00 $250.00

$35.00 $0.00 $0.00 $35.00
$0.00 $0.00 $0.00 $4.55
$209.58 $209.58 $209.58 $209.58
$28.14 $33.05 $26.79 $18.82
$292.50 $292.50 $292.50 $292.50
$815.22 $785.13 $778.87 $810.45
-$654.78 $835.31 $1,061.57 $1,329.99
 $200.00 $200.00 $200.00 $200.00
-$454.78 $1,035.31 $1,261.57 $1,529.99
$654.78 $0.00 $0.00 $0.00
$0.00 $835.31 $1,061.57 $1,329.99
$200.00 $200.00 $200.00 $200.00

200

$3,297.44 $3,952.23 $3,116.92 $2,055.35

-$654.78 $835.31 $1,061.57 $1,329.99
$3,952.23 $3,116.92 $2,055.35 $725.36

$425.00 $425.00 $425.00 $425.00

$0.00 $0.00 $0.00 $25.00
$425.00 $425.00 $425.00 $400.00

$3.41 $3.41 $3.41 $3.41

$24.73 $29.64 $23.38 $15.42
$28.14 $33.05 $26.79 $18.82

Oct. Nov. Dec. Total

$2,565.04 $1,714.40 $769.37 $25,608.29

$542.50 $542.50 $542.50 $6,510.00
$3,107.54 $2,256.90 $1,311.87 $32,118.29
$1,393.14 $1,487.54 $725.87 $6,510.00
$1,714.40 $769.37 $586.00 $25,608.29

Oct. Nov. Dec. Total

-$253.87 -$82.28 $108.64 -$2,121.08

$171.59 $190.92 $54.80 $268.44
$0.00 $0.00 $35.00 $228.00
-$82.28 $108.64 $128.44 -$2,080.64
ted 1994 net sales per month
et sales per month

es - $200*12 = $2,400 annually under seasonal production+ $ 115 additional storage/handling costs = $2,515 annually

% of profit (loss) before taxes

e last two months

to depreciation expense

($3,000,000/12) = $250,000 per month

ember 1993, with $25 being paid off every June and December
equity + net income (loss) per month
handling costs = $2,515 annually ($209.58 monthly)
Liquidity vs Risk vs Profitability comparison (in $ '000s)
Particulars Seasonal Level
Net Income 351.00 521.09
Average total assets 4,068.17 5,247.60
Return on total assets 8.63% 9.93%
Current ratio 4.39 2.24
Interest paid on short term credit 49.04 150.90
Average borrowings during the year 544.83 1,688.80
Current assets to total assets ratio 71.09% 77.59%
Average current assets 2,892.17 4,071.60