P 9-5

Telnet Corporation is a newly formed computer manufacturer. Telnet plans to begin operations on
January 1, Year 2. Selected financial information is available for the preparation of Telnet’s six-
month forecasted performance covering the period January 1 to June 30 of Year 2.

Required:
a. Prepare a pro forma income statement to portray the forecasted financial position of Telnet
Corporation for the six-month period ended June 30, Year 2.
b. Prepare a pro forma balance sheet as of June 30, Year 2.
c. Prepare a cash forecast analysis as in Exhibit 9A.4 for the six-month period ended June 30, Year 2.
a.

Telnet Corporation
Pro Forma Income Statement ($000s)
Six Months Ended June 30, Year 2

Sales revenue ($250 x 6 mos.)......................................................................................................... $1,500

Cost of goods sold (note [a])................................................................................................ 1,199
Gross margin........................................................................................................................ 301
Selling and administrative expenses ($47.5 x 6 mos.)........................................................ 285
Expected pre-tax income..................................................................................................... 16
Estimated income taxes (at 50%)....................................................................................... 8
Expected net income .............................................................................................$ 8
Note [a]: We use T-accounts to compute cost of goods sold ($ thousands)

Raw Material Inventory

Beginning (given) 0

Material purchases ($125 x 6 mos.) 750 715 To W.I.P. inventory [a] (plug)

Ending (given) 35

Work in Process Inventory

Beginning (given) 0

From raw materials inventory [a] 715 7 Prepaid expenses (given)

Labor ($30.5 x 6 mos.) 183 1,299 To F.G. inventory [b] (plug)

Variable overhead ($22.5 x 6 mos.) 135

Rent ($10 x 6 mos.) 60

Depreciation ($35 x 6 mos.) 210

Patent amortization ($.5 x 6 mos.) 3

Ending (given) 0

Finished Goods Inventory

Beginning (given) 0

From W.I.P. inventory [b] 1,299 1,199 Cost of goods sold (plug)

Ending (given) 100

b.

Telnet Corporation
Pro forma Balance Sheet ($000s)
June 30, Year 2
ASSETS
Cash....................................................................................... $ 40 (minimum cash)
Accounts receivable.............................................................. 375 (45 days' sales)*
Inventories ($35 + $100)....................................................... 135 (given)
Prepaid expenses.................................................................. 7 (given)
Total current assets............................................................ 557 (subtotal)
Equipment............................................................................. 1,200
(given)
Less accumulated depreciation........................................... 210 ($35 x 6 mos.)
Equipment, net................................................................... 990 (subtotal)
Patents................................................................................... 40 (given)
Less amortization................................................................. 3 ($500 x 6 mos.)
Patents, net.......................................................................... 37 (subtotal)
Total Assets........................................................................... $1,584

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable.................................................................. $ 125 (30 days' purchases)**
Accrued taxes........................................................................ 8 (from Inc. Stmt.)
Stockholders' equity............................................................. 1,300
(given)
Retained earnings................................................................. 8 (from Inc. Stmt.)
Additional funds needed...................................................... 143 "plug"
Total liabilities and equity................................................... $1,584

* ($250,000 x 6) / 180 days = $8,333 per day x 45 days = $375,000

** ($125,000 x 6) / 180 days = $4,166 per day x 30 days = $125,000

c.

Telnet Corporation
Forecasted Statement of Cash Flows
For Six Months Ended June 30, Year 2

Cash balance, beginning ................................................................ $ 60,000

Add collection of accounts receivable *.......................................... 1,125,000
$1,185,000
Less disbursements for
Material purchases **............................................................... 625,000
Labor......................................................................................... 183,000
Rent............................................................................................ 60,000
Overhead................................................................................... 135,000
Selling expense.......................................................................... 285,000
....................................................................................... (1,288,000)
Tentative cash balance .................................................................... $ (103,000)
Minimum cash balance required..................................................... 40,000
Additional borrowing required........................................................ $ 143,000
Ending cash balance .................................................................... $ 40,000
Loan balance ........................................................................$ 143,000

* Collection of accounts receivable Jan. Feb. Mar. Apr. May June

Sales.................................................................................... 250 250 250 250 250 250

Collections.......................................................................... 0 125 250 250 250 250

Accumulated Collections................................................... 0 125 375 625 875 1,125

** Payment of accounts payable Jan. Feb. Mar. Apr. May June

Purchases............................................................................. 125 125 125 125 125 125

Payments............................................................................ 0 125 125 125 125 125
Accumulated Payments..................................................... 0 125 250 375 500 625