Question

oys for You, a manufacturing company, has been growing quickly but has found that its financial situation is continually under pressure. Production has fluctuated to meet demand in an attempt to provide first-class service, resulting in larger inventory positions. Also, the collection of accounts has worsened to approximately 60 days, which is well above the terms of 30 days. To address the financial concerns, Toys for You has proposed level production and an effort by the credit department to bring the average collection period down to 35 days. Estimated sales for the upcoming months are: July $1,957,500 August 2,070,000 September 2,205,000 October 2,362,500 November 2,475,000 December 2,565,000 Sales for May were $1,732,500 and will be approximately $1,845,000 for the current month of June. It is projected that the current collection period of 60 days will be reduced to 50 days for July and August, 42 days for September and October, and will meet the target of 35 days in November and December. Purchases are forecast to be $585,000 a month beginning in July. In May they were $675,000, and in June they are expected to be $607,500. The purchases are paid in 40 days. Labour expense will be paid as incurred and will be $195,000 a month. Other expenses of manufacturing will also be paid as incurred and are expected to be $375,000 a month. Cost of goods sold has regularly been 70 percent of sales. Amortization is $38,000 per month. Selling and administrative expenses are expected to be 13 per- cent of sales. The tax rate is 42 percent. There will be payments on notes of $675,000 in each of August and November. Interest of $270,000 and income taxes of $338,000 are both due in October. Dividends of $22,500 are payable in July and October. Toys For You Balance Sheet (estimated) June 30, 2016 ($ thousands) Assets Current assets: Cash $666 Accounts receivable 3,578 Inventory 8,231 Total current assets 12,475 Capital assets: Plant and equipment 11,273 Less: Accmulated amortization 4,784 6,489 Total assets $18,964 Liabilities and Shareholders Equity Current liabilities Accounts payable $945 Notes payable 3,700 Accrued liabilities 2,596 Total current liabilities 7,241 Long-term debt 4,725 Common stock 4,500 Retained earnings 2,498 Total liabilities and shareholders' equity $18,964 Using the information above, prepare pro forma statements for Toys for You for the three months ending September and December 2016. Also construct a cash budget for the six-month period and identify any need for short-term financing. There are no changes in accounts not mentioned above. Comment on the policy changes and examine the consequences if the collection period remains at 60 days. Assume capital assets are sufficient for increased sales. Show all calculations.

Answer 1

IF YOU HAVE ANY DOUBTS COMMENT BELOW

ANSWER:

EXPLANATION:

Cash Budget till December
	May	June	July	August	Sept	oct	Nov	Dec	Remarks
Sales	1732500	1845000	1957500	2070000	2205000	2362500	2475000	2565000
Purchases	675000	607500	585000	585000	585000	585000	585000	585000
Cash Collection
Sales of May (60 days)			1732500
Sales of June (60 days)				1845000
Sales of July (50 days)				652500	1305000				10 days sales is expected to be collected in next month
Sales of August (50 days)					690000	1380000			10 days sales is expected to be collected in next month
Sales of September (42 days)						1323000	882000		18 days sales is expected to be collected in next month
Sales of October (42 days)							1417500	2362500	18 days sales is expected to be collected in next month
Sales of November (35 days)								2062500	25 days sales is expected to be collected in next month
Total Cash inflow			1732500	2497500	1995000	2703000	2299500	4425000
* Considered that sales are linear during the month
* DSO is mentioned in the brackets
Expenses
Suppliers (40 Days)			630000	592500	585000	585000	585000	585000	20 days purchase in payable in next month and 10 days in m+2
Labour Expenses			195000	195000	195000	195000	195000	195000
Other Expenses			375000	375000	375000	375000	375000	375000
SG&A (13%)			254475	269100	286650	307125	321750	333450
Payment of Notes				675000			675000
Interest Payment						270000
Income Taxes						338000
Dividend Payable			22500			22500
Total Cash Outflow			1476975	2106600	1441650	2092625	2151750	1488450
Culumative Cash Balance		666000	921525	1312425	1865775	2476150	2623900	5560450
* Considered that sales are linear during the month