Play Time Toy Co.

Harvard Business School Case #292-003

Case Software #XLS075

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Table A Condensed Income Statements, 1988-1990 (thousands of dollars)

1988 1989 1990

Net sales $5,198 $5,950 $7,433

Cost of goods sold 3,586 4,284 5,203
Gross profit $1,612 $1,666 $2,230
Operating expenses 1,270 1,549 1,860
Profit before taxes $342 $117 $370
Federal income taxes 116 46 126
Net profit $226 $71 $244
Table B Balance Sheet at December 31, 1990 (thousands of dollars)

Cash $175
Accounts receivable 2,628
Inventory 530
Current assets $3,333
Plant and equipment, net 1,070
Total assets $4,403

Accounts payable $255

Notes payable, bank 680
Accrued taxesa 80
Long-term debt, current portion 50
Current liabilities $1,065
Long-term debt 400
Shareholders’ equity 2,938
Total liabilities and shareholders’ equity $4,403

a
The company was required to make estimated tax payments on the 15th of April, June, September, and
December. In 1990 it elected to base its estimated tax payments on the previous year’s tax. The balance of
$80,000 was due on March 15, 1991.
Table C Monthly Sales Data (thousands of dollars)

Sales Projected
1990 1991

January $70 $108

February 88 126
March 98 145
April 90 125
May 88 125
June 95 125

July 98 145
August 1,173 1,458
September 1,390 1,655
October 1,620 1,925
November 1,778 2,057
December 850 1,006
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1991 (thousands of dollars)

Actual Dec.
31, 1990 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Casha $175 $787 $1,366 $1,110 $924 $794 $587 $428 $175 $175 $175 $175 $175
Accounts receivableb 2,628 958 234 271 270 250 250 270 1,603 3,113 3,580 3,982 3,063
Inventoryc 530 530 530 530 530 530 530 530 530 530 530 530 530

Current assets $3,333 $2,275 $2,130 $1,911 $1,724 $1,574 $1,367 $1,228 $2,308 $3,818 $4,285 $4,687 $3,768
Net plant and equipmentd 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070

Total assets $4,403 $3,345 $3,200 $2,981 $2,794 $2,644 $2,437 $2,298 $3,378 $4,888 $5,355 $5,757 $4,838
Accounts payablee $255 $33 $38 $43 $37 $37 $38 $44 $438 $496 $577 $617 $302
Notes payable, bankf 680 0 0 0 0 0 0 0 437 1,611 1,608 1,541 880
Accrued taxesg 80 27 (24) (153) (235) (286) (369) (419) (334) (260) (128) 18 25
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities $1,065 $110 $64 ($60) ($148) ($199) ($281) ($325) $591 $1,897 $2,107 $2,226 $1,257
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders' equity 2,938 2,835 2,736 2,641 2,542 2,443 2,343 2,248 2,412 2,616 2,873 3,156 3,231

Total liabilities and equity $4,403 $3,345 $3,200 $2,981 $2,794 $2,644 $2,437 $2,298 $3,378 $4,888 $5,355 $5,757 $4,838

a
Assumed maintenance of minimum $175,000 balance and included excess cash in months when company was out of debt.
b
Assumed 60-day collection period.
c
Assumed inventories maintained at December 31, 1990, level for all of 1991.
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 $2,700,000 for 1991 as against sales of $9 million. This represented a 30-day payment period. Since inventories were level, purchases would follow seasonal production
and sales pattern.

Plug figure.
f

g
Taxes payable on 1990 income were due on March 15, 1991. On April 15, June 15, September 15, and December 15, 1991, payments of 25% each of the estimated tax for 1991 were due. In estimating its tax liability for 1991, the company had the option of
using the prior year's tax liability ($126,000) for its estimate and making any adjusting tax payments in 1992. Alternatively, the company could estimate its 1991 tax liability directly. Play Time planned to use its prior year's tax liability as its estimate and to pay
$31,000 in April and September and $32,000 in June and December.

h
To be repaid at the rate of $25,000 each June and December.
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1991 (thousands of dollars)

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Net sales $108 $126 $145 $125 $125 $125 $145 $1,458 $1,655 $1,925 $2,057 $1,006
Cost of goods solda 76 88 101 87 87 88 102 1,021 1,158 1,348 1,440 704

Gross profit $32 $38 $44 $38 $38 $37 $43 $437 $497 $577 $617 $302

Operating expensesb 188 188 188 188 188 188 188 188 188 188 188 188

Profit (loss) before taxes ($156) ($150) ($144) ($150) ($150) ($151) ($145) $249 $309 $389 $429 $114
Income taxesc (53) (51) (49) (51) (51) (51) (50) 85 105 132 146 39

Net Profit ($103) ($99) ($95) ($99) ($99) ($100) ($95) $164 $204 $257 $283 $75

a
Assumed cost of goods sold equal to 70% sales.
b
Assumed to be same for each month throughout the year.
c
Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.
Total

$9,000
6,300

$2,700

2,256

$444
151

$293