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
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 taxesa 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.
Table C Monthly Sales Data (thousands of dollars)
COGS Factor 65.10%
Sales Projected

1993 1994 (Projected) 1994 Inventory Level OGS Sold

Jan $64 $120 542 78.12

Feb 88 140 543 91.14
Mar 96 160 542 104.16
Apr 88 140 543 91.14
May 87 140 542 91.14
Jun 95 140 543 91.14
Jul 96 160 542 104.16
Aug 1,251 1,620 543 1054.62
Sept 1,474 1,840 542 1197.84
Oct 1,723 2,140 543 1393.14
Nov 1,965 2,285 542 1487.535
Dec 940 1,115 543 725.865

Total $7,967 $10,000 $6,510 $6,510

Monthly level COGS 6510

Monthly level 542.5

100
A/c Payable@30% 162.75 70 30

total a/c payable 3000

250
 1,965
Ending Inventory
Beginning (Finished goods month
Inventory end) 940
1,965
586 1050 940
1050 1502 $120
1502 1940 140
1940 2391 160
2391 2842 140
2842 3294 140
3294 3732 140
3732 3220 160
3220 2565 1620
2565 1714 1840
1714 769 2140
769 586 2285

2390.1
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

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

Net sales $120 $140 $160 $140 $140 $140 $160 $1,620 $1,840 $2,140 $2,285 $1,115
Cost of goods solda 84 98 112 98 98 98 112 1,134 1,288 1,498 1,600 780

Gross profit $36 $42 $48 $42 $42 $42 $48 $486 $552 $642 $685 $335

Operating expensesb 200 200 200 200 200 200 200 200 200 200 200 200
Interest expense 7 4 4 4 4 4 3 5 12 17 17 14
Interest incomec 2 4 5 4 3 3 2 1 1 1 1 1

Profit (loss) before taxes ($169) ($158) ($151) ($158) ($159) ($159) ($153) $282 $341 $426 $469 $122
Income taxesd (57) (54) (51) (54) (54) (54) (52) 96 116 145 159 42

Net Profit ($112) ($104) ($100) ($104) ($105) ($105) ($101) $186 $225 $281 $310 $80

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. The federal tax rate on all earnings was 34%.
Total

$10,000
7,000

$3,000

2,400
95
28

$533
182

$351
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

Actual
Dec. 31,
1993
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Casha $200 $878 $1,526 $1,253 $1,054 $915 $696 $527 $200 $200 $200 $200 $200
Accounts receivableb 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400
Inventoryc 586 586 586 586 586 586 586 586 586 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 $1,940 $1,781 $1,562 $1,413 $2,566 $4,246 $4,766 $5,211 $4,186
Net plant and equipmentd 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Total assets $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362
Accounts payablee ($282) ($36) ($42) ($48) ($42) ($42) ($42) ($48) ($486) ($552) ($642) ($686) ($334)
Accounts payablee $282 $36 $42 $48 $42 $42 $42 $48 $486 $552 $642 $686 $334
Notes payable, bankf 752 0 0 0 0 0 0 0 433 1,741 1,745 1,677 942
Accrued taxesg 88 31 (23) (162) (251) (305) (394) (448) (352) (271) (126) 33 40
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities $1,172 $117 $69 ($64) ($159) ($213) ($302) ($350) $617 $2,072 $2,311 $2,446 $1,366
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders’ equity 3,295 3,183 3,079 2,979 2,875 2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646

Total liabilities and equity $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362

a
Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt.
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 1994 as against sales of $10 million. This represents a 30-day payment period. Since
inventories are level, purchases will follow seasonal production and sales pattern.
f
Plug figure.
g
Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In
estimating its tax liability for 1994, the company has the option of using the prior year’s tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the
company could estimate its 1994 tax liability directly. Toy World planned to use its prior year’s tax liability as its estimate and to pay $35,000 in April, June, September, and December.

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

88 (57) (54) (51) (54) (54) (54) (52) 96 116 145 159 42
31 (111) (105) (105) (108) (108) (106) 44 212 261 304 201
88
-26.25
(167)
 -1 salesreceivables

Nov-13 1,965
Dec-13 940 Collection if 60day
Jan $120 2,905 1965
Feb $140 1,060 940
#consequence of seas Mar $160 260 120
Apr $140 300 140
May $140 300 160
Jun $140 280 140
Jul $160 280 140
Aug $1,620 300 140
Sept $1,840 1,780 160
Oct $2,140 3,460 1620
Nov $2,285 3,980 1840
Dec $1,115 4,425 2140
2285
 182
224
 Fig 1: Seasonality in Monthly Sales
$2,500

$2,000

$1,500

$1,000

$500

1993 1994 (Projected)

$0
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
 Fig 2: Proforma Balance Sheet - Seasonal (1994)
6000 $6,000

5000 $5,000

4000 $4,000

3000 $3,000

2000 $2,000

1000 $1,000

0 $0
1 2 3 4 5 6 7 8 9 10 11 12 13
Inventory Accounts Receivable Bank Funding Accounts Payable
 The Rationale for Level Production
Savings from Level Production
Overtime Premium 225000
Other Direct Labour Savings 265000 Orderly Productions
Net Savings 490000
Financing
Storage Costs (Increase) 115000
Reduction in income from short term
investments -17000 11000-28000
Increase in Interest expense 96000 191000-95000
Inventory Losses ??? Can you estimate
Net Pre-tax savings 262000
Less: Taxes @ 34% 89080

Net Total 172920

Pro Forma Balance Sheets Under Level Production, 1994 (thousands of dollars)

Actual
Dec. 31,
1993
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Casha $200 $627 $816 $200 $200 $200 $200 $200 $200 $200 $200 $200 $200
Accounts receivableb 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400
Inventoryc 586 1050 1502 1940 2391 2842 3294 3732 3220 2565 1714 769 586

Current assets $3,691 $2,737 $2,578 $2,440 $2,891 $3,322 $3,774 $4,232 $5,200 $6,225 $5,894 $5,394 $4,186
Net plant and equipmentd 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Total assets $4,867 $3,913 $3,754 $3,616 $4,067 $4,498 $4,950 $5,408 $6,376 $7,401 $7,070 $6,570 $5,362

Accounts payablee $282 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250
Notes payable, bankf 752 0 0 104 752 1348 2027 2647 3319 4,018 3,234 2,229 942
Accrued taxesg 88 30 25 167 260 319 416 478 368 267 94 99 124
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities $1,172 $330 $275 $237 $792 $1,328 $1,910 $2,469 $3,251 $4,051 $3,439 $2,629 $1,366
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders’ equity 3,295 3,183 3,079 2,979 2,875 2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646

Total liabilities and equity $4,867 $3,913 $3,754 $3,616 $4,067 $4,498 $4,950 $5,408 $6,376 $7,401 $7,070 $6,570 $5,362

Balance $0.00 $0.00 $0.00 $0.00 $0.00 $0.01 $0.00 $0.00 $0.00 $0.01 $0.00 $0.00
BankLoan

a
Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt.
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 1994 as against sales of $10 million. This represents a 30-day payment period. Since
inventories are level, purchases will follow seasonal production and sales pattern.
f
Plug figure.
g
Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In
estimating its tax liability for 1994, the company has the option of using the prior year’s tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the
company could estimate its 1994 tax liability directly. Toy World planned to use its prior year’s tax liability as its estimate and to pay $35,000 in April, June, September, and December.

h
To be repaid at the rate of $25,000 each June and December.
-1
 Fig 3: Cash Flow and Bank Funding - Level (1994)
7000 $6,000

6000
$5,000

5000
$4,000

4000

$3,000

3000

$2,000
2000

$1,000
1000

0 $0
1 2 3 4 5 6 7 8 9 10 11 12
Inventory Accounts Receivable Bank Funding Accounts Payable
 Pro Forma Income Statement Under LEVEL Production, 1994 (thousands of dollars)

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

Net sales $120 $140 $160 $140 $140 $140 $160 $1,620 $1,840 $2,140 $2,285 $1,115
Cost of goods solda 78 91 104 91 91 91 104 1055 1198 1393 1488 726

Gross profit $42 $49 $56 $49 $49 $49 $56 $565 $642 $747 $797 $389

Operating expenses Existing 200 200 200 200 200 200 200 200 200 200 200 200
Increased Storage and Hand 5 7 9 11 13 15 17 14 12 8 3 3
Net Operating Expenses 205 207 209 211 213 215 217 214 212 208 203 203
Interest expense 6 3 4 6 11 16 21 25 31 30 23 15
Interest incomec 1 2 2 1 1 1 1 1 1 1 1 1

Profit (loss) before taxes ($170) ($164) ($158) ($169) ($176) ($182) ($182) $325 $399 $508 $570 $171
Income taxesd (58) (56) (54) (57) (60) (62) (62) 110 136 173 194 58

Net Profit ($112) ($104) ($100) ($104) ($105) ($105) ($101) $186 $225 $281 $310 $80

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. The federal tax rate on all earnings was 34%.
Total a Sales:COGS 0.651

$10,000
6510 Total Production 1994

$3,490

Total Storage Storage

2,400 and Handling factor
115 230 0.45%
2515
191 Interest Income 4%
11 Interest rate 9%
LT Debt 9.63%
$772
263 Tax Rate 0.34

$351 5/8 0.625

Accrued Taxes

Accrued Taxes from Taxes payable on Taxes Accrued taxes

Month Prior Month profits in Month Paid at end of month
Jan 88 -58 0 30
Feb 30 -56 0 -25
Mar -25 -54 88 -167
Apr -167 -57 35 -260
May -260 -60 0 -319
Jun -319 -62 35 -416
Jul -416 -62 0 -478
Aug -478 110 0 -368
Sep -368 136 35 -267
Oct -267 173 0 -94
Nov -94 194 0 99
Dec 99 58 34 124