Genesis Corp. is a traditional retailer that recently also started an Internet-b

Question

Genesis Corp. is a traditional retailer that recently also started an Internet-based subsidiary that sells its product online. Its sales in September 2017 were $700,000. Tom Scott, the company president, is preparing for a meeting with Dan Harris, a loan officer with Mojito Bank, to review year end financing requirements. After discussions with the company’s marketing and finance managers, sales over the next three months were forecasted as follows. Sales in October 2017: $2,500,000, sales in November 2017: $3,500,000 and sales in December 2017: $2,750,000.

Genesis’ balance sheet as of the end of September, 2017 was as follows.

____________________________________________________________________

Genesis Corporation                                                             

Balance Sheet as of September 30, 2017 (in $ Thousands)

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Cash                              $ 60                               Accounts payable         $   10                         

Accounts receivable         700                               Notes payable                  800

Inventories                       600                              Long-term debt               400

Net fixed assets               750                                  Total liabilities          1,210

                                                                                       Equity                           900

          Total assets          $2,110                                       Total                   $2,110

     ____________________________________________________________________

All sales are made on credit terms of net 30 days and are collected the following month and no bad debts are anticipated. The accounts receivable on the balance sheet at the end of September thus will be collected in October. The October sales will be collected in November, and so on. The amount of Inventory on hand represents the operating level which the company intends to maintain (i.e., not percentage of sales). Cost of goods sold average 80 percent of sales. Inventory is purchased in the month of sale and paid for in cash. Other cash expenses average 7 percent of sales. Depreciation is $10,000 per month. Assume taxes are paid monthly and the effective income tax rate is 40 percent for planning purposes.

      The annual interest rate on outstanding long term debt and notes payable is 12% per annum. There are no capital expenditures planned during the period, and no dividends will be paid. The company’s desired end-of-month cash balance is $80,000. The president hopes to meet any cash shortages during the period by borrowing (short term) from the bank at the end of the month. The interest rate on the new bank loans will be 12% per annum. All interest expenses are estimated based on last month’s debt.

A.Prepare monthly pro forma cash budgets for October, November, and December 2017.                        

        B.Prepare monthly pro forma income statements for October, November, and December 2017.   

C.Prepare monthly pro forma balance sheets at the end of October, November, and December 2017.   

Explanation / Answer

Sales Budget October November December Total Jan Feb Sales (dollars) 2500000 3500000 2750000 8750000 0 0 Since closing and opening equal, Total requirement 2500000 3500000 2750000 8750000 Cost of goods sold 80% i.e. purchases 2000000 2800000 2200000 7000000 1. Cash Budget October November December Total April Sales Collections 700000 2500000 3500000 6700000 1650000 Disbursment: Purchases 2000000 2800000 2200000 7000000 Other Cash Expenses 7% of sales 175000 245000 192500 612500 Interest Expense 12000 28282 35682 75964 Income Tax 121200 166687 124727 412615 -Total Disbursment 2308200 3239969 2552909 8101078 Change in Cash -1608200 -739969 947091 -1401078 Beginning Balance 60000 80000 80000 60000 Ending Balance -1548200 -659969 1027091 -1341078 Borrowing 1628200 739969 -947091 1421078 Ending Balance 80000 80000 80000 80000 2. Budgeted Income Statement October November December Total Sale 2500000 3500000 2750000 8750000 Cost of Goods Sold 2000000 2800000 2200000 7000000 Gross Profit 500000 700000 550000 1750000 Other Expenses-Cash 175000 245000 192500 612500 Depreciation 10000 10000 10000 30000 Net Income from operations 315000 445000 347500 1107500 Other Revenue and Expense: Interest Expense 12*(800000+400000)*1/12-Old Loan 12000 12000 12000 36000 Interest Expense New Loan 16282 23682 39964 Net Income before tax 303000 416718 311818 1031536 Less: Income Tax 40% 121200 166687 124727 412615 Net Income 181800 250031 187091 618922 3. Proforma Balance sheet Cash 80 Accounts Receivable 2750 Dec Sale Inventories 600 Net Fixed Assets 750-30 720 Total Assets 4150 Accounts Payable 10 Note Payable 800 Long Term Debt 400 Borrowing-New 1421 Total Liabilities 2631 Equity 900 Retained Earning 619 Total Liabiliities and equity 4150

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