It is January 1 st , 2014 and Oscar D’Souza has decided to start a new business.

Question

It is January 1st, 2014 and Oscar D’Souza has decided to start a new business. He wants to forecast the first year’s Income Statement and Balance sheet. He believes the assumptions below are reasonable – and wants you to assist him by creating the forecasted statements. You agree. Please construct an Income Statement and Balance Sheet from the information provided below. (25 points)

-First year sales will total $100,000

-Gross margins will be 50%

-Operating margins will be 20%

-Accounts Receivables will be about 15% of sales

-Inventory will be 12% of sales

-Accounts Payable will be 5% of sales

-Accrued expenses payable will be 7% of sales

-The Bank of Connecticut will provide a loan of $30,000. The annual interest will be 8%, compounded annually. Interest only payments are needed – until the loan is due in 5 years, where a balloon payment for the full balance must be paid.

-The combined federal and provincial tax rates will be 30%

-Capital equipment purchases will be made at the start of the year. These will total $35,000. These will depreciate at 10% per year

-D’Souza wants ending cash to be $24,500; he feels he needs this on hand at year-end

-D’Souza will provide any other capital needed in the form of equity financing

Explanation / Answer

Income Statement Sales                            100,000 Less:COGS 50000 =100000*50% Gross Profit 50000 =100000*50% Less:Operating Expenses                               30,000 balancing figure =50000-20000 Operating Profit                               20,000 =100000*20% Less: Interest                                 2,400 =30000*8% Profit before tax                               17,600 Less: Taxes@30%                                 5,280 =17600*30% Profit after tax                               12,320 Balance Sheet Capital Equipment 35000 Equity Financing    28,680 =83000-5000-7000-30000-12320 Less:Accumulated depreciation 3500 =35000*10% 31500 Retained Earning    12,320 Accounts Receiavable                               15,000 =100000*15% Accounts Payable      5,000 =100000*5% Inventory                               12,000 =100000*12% Accrued Expenses Payable      7,000 =100000*7% Cash 24500 Bank Loan 30000 Total 83000 54320

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