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Table A: Condensed Income Statements, 1991-1993 (thousands of dollars)

1991

1992

1993

Net sales $5,213 Cost of goods sold 3597 Gross profit $1,616 Operating expenses 1199 Interest expense 68 Interest income 20 Profit before taxes $369 Federal income taxes 125 Net profit $244

$6,167 4440 $1,727 1542 75 15 $125 43 $82

$7,967 5577 $2,390 1912 85 16 $409 139 $270

Table B: Balance Sheet at December 31, 1993 (thousands of dollars)

Cash Accounts receivable Inventory Current assets Plant and equipment, net Total assets

$200 2905 586 $3,691 1176 $4,867

Accounts payable Notes payable, bank Accrued taxes(a) Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and shareholders' equity

$282 752 88 50 $1,172 400 3295 $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.

ril, June, September, vious year's tax. The

Table C: Monthly Sales Data (thousands of dollars)

Sales 1993 Actual 1994 Projected

Total $7,967 $10,000

Jan $64 $120

Feb 88 140

Mar 96 160

Apr 88 140

May 87 140

Jun 95 140

Jul 96 160

Aug 1251 1620

Sep 1474 1840

Oct 1723 2140

Nov 1965 2285

Dec 940 1115

Exhibit 1

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

Note

Cash Accounts receivable Inventory Current assets Net plant and equipment

Actual Dec. 31, 1993

(a) (b) (c)

$3,691 (d)

Total assets

Total liabilities and equity

1176 $4,867

Accounts payable (e) Notes payable, bank (f) Accrued taxes (g) Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity

$200 2905 586

(h)

$282 752 88 50 $1,172 400 3295

$4,867

Jan.

Feb.

$878 1060 586 $2,524 1176

Mar.

Apr.

$1,526 260 586

$1,253 300 586

$1,054 300 586

$2,372

$2,139

$1,940

1176

1176

1176

$3,700

$3,548

$3,315

$3,116

$36

$42

$48

$42

31 50

-23 50

-162 50

-251 50

$117 400 3183

$69 400 3079

($64 400 2979

($159 400 2875

$3,700

$3,548

$3,315

$3,116

Notes: (a)Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is o (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 1 This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal produc (f)Plug figure.

(g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and Dec each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the opti ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company cou Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, Septem (h)To be repaid at the rate of $25,000 each June and December.

thousands of dollars)

May

June

$915 280 586 $1,781 1176

July

$696 280 586 $1,562 1176

Aug.

$527 300 586 $1,413 1176

$2,957

$2,738

$2,589

$42

$42

$48

-305 50

-394 50

($213 400 2770

($302 375 2665

$2,957

$2,738

Sept.

$200 1780 586 $2,566 1176 $3,742

Oct.

$200 3460 586 $4,246 1176 $5,422

Nov.

$200 3980 586 $4,766 1176 $5,942

$200 4425 586 $5,211 1176 $6,387

-448 50

$486 433 -352 50

$552 1741 -271 50

$642 1745 -126 50

$686 1677 33 50

($350 375 2564

$617 375 2750

$2,072 375 2975

$2,311 375 3256

$2,446 375 3566

$5,422

$5,942

$6,387

$2,589

$3,742

onths when company is out of debt.

ases of $3,000,000 for 1994 as against sales of $10 million. follow seasonal production

September 15, and December 15, 1994, payments of 25% e company has the option of using the prior year's tax liability tively, the company could estimate its 1994 tax liability directly. 00 in April, June, September, and December.

Dec.

$200 3400 586 $4,186 1176 $5,362 $334 942 40 50 $1,366 350 3646

$5,362

Exhibit 2

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

Jan.

Net sales Cost of goods sold(a) Gross profit Operating expenses(b) Interest expense Interest income(c)

Feb.

Mar.

Apr.

May

$120 84

$140 98

$160 112

$140 98

$140 98

$36

$42

$48

$42

$42

200 7 2

200 4 4

200 4 5

200 4 4

200 4 3

Profit (loss) before taxes Income taxes(d)

($169 -57

($158 -54

($151 -51

($158 -54

($159 -54

Net Profit

($112

($104

($100

($104

($105

(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 shee

ands of dollars)

June

July

Aug.

$140 98

$160 112

$42

$48

Sept.

$1,620 1134 $486

$1,840 1288 $552

Oct.

Nov.

$2,140 1498 $642

Dec.

$2,285 1600 $685

$1,115 780 $335

200 4 3

200 3 2

200 5 1

200 12 1

200 17 1

200 17 1

200 14 1

($159 -54

($153 -52

$282 96

$341 116

$426 145

$469 159

$122 42

($105

($101

$186

$225

$281

$310

$80

cash balances.

es shown on balance sheet. The federal tax rate on all earnings was 34%.

Total

$10,000 7000 $3,000 2400 95 28 $533 182 $351

Toy World, Inc. Net Savings from Level Production

Net Profit (level production) Net Profit (seasonal production) Net savings from shift to level production

Jan. Feb. Mar. Apr. May -$116.50 -$107.56 -$102.68 -$108.74 -$111.97 -112 -$104.00 -$100.00 -$104.00 -$105.00 -$4.50 -$3.56 -$2.68 -$4.74 -$6.97

June July Aug. Sept. Oct. Nov. Dec. Total -$114.94 -$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 521.09 -$105.00 -$101.00 $186.00 $225.00 $281.00 $310.00 $80.00 $351.00 -$9.94 -$12.49 $33.69 $42.22 $52.08 $60.61 $26.37 $170.09

Toy World, Inc. Pro Forma Balance Sheets Under Level Production, 1994 (thousand of dollars)

Jan.

Feb.

Mar.

Apr.

May

Cash Accounts receivable Inventory Current assets Net plant and equipment Total assets

$620.11 $1,060.00 $1,050.38 $2,730.49 $1,176.00 $3,906.49

$805.78 $260.00 $1,501.74 $2,567.52 $1,176.00 $3,743.52

$200.00 $300.00 $1,940.08 $2,440.08 $1,176.00 $3,616.08

$200.00 $300.00 $2,391.44 $2,891.44 $1,176.00 $4,067.44

$200.00 $280.00 $2,842.80 $3,322.80 $1,176.00 $4,498.80

Accounts payable Notes payable, bank Accrued taxes Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and equity check

$250.00 $250.00 $250.00 $250.00 $250.00 $0.00 $0.00 $116.14 $767.26 $1,368.27 $27.99 -$27.42 -$168.32 -$259.34 -$317.02 $50.00 $50.00 $50.00 $50.00 $50.00 $327.99 $272.58 $247.82 $807.92 $1,351.25 $400.00 $400.00 $400.00 $400.00 $400.00 $3,178.50 $3,070.94 $2,968.26 $2,859.52 $2,747.55 $3,906.49 $3,743.52 $3,616.08 $4,067.44 $4,498.80 $0.00 $0.00 $0.00 $0.00 $0.00

Notes: Accounts receivable - Sales of the last two months Net plant and equipment - Equal to depreciation expense Accounts payable - 30% of sales ($3,000,000/12) = $250,000 per month Notes payable - Balancing figure Long-term debt (current portion) - $50 Long-term debt - $400 as of December 1993, with $25 being paid off ever Shareholders' equity - Beginning equity + net income (loss) per month

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

$200.00 $280.00 $3,294.16 $3,774.16 $1,176.00 $4,950.16

$200.00 $300.00 $3,732.50 $4,232.50 $1,176.00 $5,408.50

$200.00 $1,780.00 $3,220.38 $5,200.38 $1,176.00 $6,376.38

$200.00 $3,460.00 $2,565.04 $6,225.04 $1,176.00 $7,401.04

$200.00 $3,980.00 $1,714.40 $5,894.40 $1,176.00 $7,070.40

$200.00 $4,425.00 $769.37 $5,394.37 $1,176.00 $6,570.37

$200.00 $3,400.00 $586.00 $4,186.00 $1,176.00 $5,362.00

$250.00 $2,053.79 -$411.23 $50.00 $1,942.56 $375.00 $2,632.61 $4,950.16 $0.00

$250.00 $2,684.08 -$469.70 $50.00 $2,514.38 $375.00 $2,519.12 $5,408.50 $0.00

$250.00 $3,319.10 -$356.52 $50.00 $3,262.58 $375.00 $2,738.80 $6,376.38 $0.00

$250.00 $3,973.88 -$253.87 $50.00 $4,020.01 $375.00 $3,006.02 $7,401.04 $0.00

$250.00 $3,138.58 -$82.28 $50.00 $3,356.30 $375.00 $3,339.10 $7,070.40 $0.00

$250.00 $250.00 $2,077.01 $767.47 $108.64 $128.44 $50.00 $50.00 $2,485.65 $1,195.91 $375.00 $350.00 $3,709.72 $3,816.09 $6,570.37 $5,362.00 $0.00 $0.00

tion expense 0/12) = $250,000 per month

, with $25 being paid off every June and December t income (loss) per month

Toy World, Inc. Pro Forma Income Statement Under Level Production, 1994 (thousands of dollars) Jan.

Net sales Cost of goods sold Gross profit Operating expenses Interest expense Interest income Profit (loss) before taxes Income taxes Net Profit

$120.00 $78.12 $41.88 $209.58 $9.25 $0.44 -$176.51 -$60.01 -$116.50

Feb.

$140.00 $91.14 $48.86 $209.58 $3.61 $1.36 -$162.97 -$55.41 -$107.56

Mar.

$160.00 $104.16 $55.84 $209.58 $3.61 $1.77 -$155.58 -$52.90 -$102.68

Apr.

$140.00 $91.14 $48.86 $209.58 $4.48 $0.44 -$164.76 -$56.02 -$108.74

May

$140.00 $91.14 $48.86 $209.58 $9.36 $0.44 -$169.65 -$57.68 -$111.97

June

$140.00 $91.14 $48.86 $209.58 $13.87 $0.44 -$174.15 -$59.21 -$114.94

Notes: Net sales - Estimated 1994 net sales per month COGS - 65.1% of net sales per month Operating expenses - $200*12 = $2,400 annually under seasonal production+ $ 1 Interest expense Interest income Income taxes - 34% of profit (loss) before taxes

July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

$160.00 $1,620.00 $1,840.00 $2,140.00 $2,285.00 $1,115.00 ### $104.16 $1,054.62 $1,197.84 $1,393.14 $1,487.54 $725.87 $6,510.00 $55.84 $565.38 $642.16 $746.86 $797.47 $389.14 $3,490.00 $209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $2,515.00 $18.65 $23.38 $28.14 $33.05 $26.79 $18.82 $193.01 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $7.54 -$171.95 $332.86 $404.88 $504.67 $561.54 $161.17 $789.53 -$58.46 $113.17 $137.66 $171.59 $190.92 $54.80 $268.44 -$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 $521.09

r seasonal production+ $ 115 additional storage/handling costs = $2,515 annually ($209.58 monthly)

8 monthly)

Toy World, Inc. Cash Budget Under Level Productions, 1994 (thousands of dollars)

Jan.

Feb.

Mar.

Inflows Collections After-tax interest income Total

$1,965.00 $0.44 $1,965.44

$940.00 $1.36 $941.36

$120.00 $1.77 $121.77

Outflows Payments of accounts payable Tax payments Repayment of long-term debt Operating expenses Interest expense Wages Total Net inflow (outflow) Beginning cash Ending cash before any loan increase or repayment Loan availment Loan repayment End-of-month cash balance

$282.00 $0.00 $0.00 $209.58 $9.25 $292.50 $793.33 $1,172.11 $200.00 $1,372.11 $0.00 $752.00 $620.11

$250.00 $0.00 $0.00 $209.58 $3.61 $292.50 $755.69 $185.67 $620.11 $805.78 $0.00 $0.00 $805.78

$250.00 $88.00 $0.00 $209.58 $3.61 $292.50 $843.69 -$721.92 $805.78 $83.86 $116.14 $0.00 $200.00

Min cash balance

$200.00

Loan balance, beg. Availment (Repayment) Loan balance, end

$752.00 $752.00 $0.00

$0.00 $0.00 $0.00

$0.00 -$116.14 $116.14

Long-term debt Balance, beg. Repayment Balance, end

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$3.61 $5.64 $9.25

$3.61 $0.00 $3.61

$3.61 $0.00 $3.61

Interest Expense on long-term debt on notes payable

Interest income

9.625% 9.000%

4.00%

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

$140.00 $0.44 $140.44

$160.00 $0.44 $160.44

$140.00 $0.44 $140.44

$140.00 $0.44 $140.44

$140.00 $0.44 $140.44

$160.00 $1,620.00 $1,840.00 $0.44 $0.44 $0.44 $160.44 $1,620.44 $1,840.44

$250.00 $35.00 $0.00 $209.58 $4.48 $292.50 $791.56 -$651.12 $200.00 -$451.12 $651.12 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $9.36 $292.50 $761.45 -$601.01 $200.00 -$401.01 $601.01 $0.00 $200.00

$250.00 $35.00 $3.34 $209.58 $13.87 $292.50 $804.30 -$663.86 $200.00 -$463.86 $663.86 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $18.65 $292.50 $770.73 -$630.29 $200.00 -$430.29 $630.29 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $23.38 $292.50 $775.46 -$635.02 $200.00 -$435.02 $635.02 $0.00 $200.00

$250.00 $250.00 $250.00 $35.00 $0.00 $0.00 $0.00 $0.00 $0.00 $209.58 $209.58 $209.58 $28.14 $33.05 $26.79 $292.50 $292.50 $292.50 $815.22 $785.13 $778.87 -$654.78 $835.31 $1,061.57 $200.00 $200.00 $200.00 -$454.78 $1,035.31 $1,261.57 $654.78 $0.00 $0.00 $0.00 $835.31 $1,061.57 $200.00 $200.00 $200.00

$116.14 $767.26 $1,368.27 $2,032.13 $2,662.42 $3,297.44 $3,952.23 $3,116.92 -$651.12 -$601.01 -$663.86 -$630.29 -$635.02 -$654.78 $835.31 $1,061.57 $767.26 $1,368.27 $2,032.13 $2,662.42 $3,297.44 $3,952.23 $3,116.92 $2,055.35

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $25.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$3.61 $0.87 $4.48

$3.61 $5.75 $9.36

$3.61 $10.26 $13.87

$3.41 $15.24 $18.65

$3.41 $19.97 $23.38

$3.41 $24.73 $28.14

$3.41 $29.64 $33.05

$3.41 $23.38 $26.79

Dec.

$2,140.00 $0.44 $2,140.44

Total

9,505 8 9,513

$250.00 $35.00 $4.55 $209.58 $18.82 $292.50 $810.45 $1,329.99 $200.00 $1,529.99 $0.00 $1,329.99 $200.00 200 $2,055.35 $1,329.99 $725.36

$425.00 $25.00 $400.00

$3.41 $15.42 $18.82

Toy World, Inc. Schedule of Changes Affecting Inventory, 1994 (thousands of dollars) Jan.

Feb.

Mar.

Apr.

May

Finished Goods, Beg. $586.00 $1,050.38 $1,501.74 $1,940.08 $2,391.44 Finished Goods Completed $542.50 $542.50 $542.50 $542.50 $542.50 Finished Goods Available for Sale$1,128.50 $1,592.88 $2,044.24 $2,482.58 $2,933.94 Cost of Goods Sold $78.12 $91.14 $104.16 $91.14 $91.14 Finished Goods, End. $1,050.38 $1,501.74 $1,940.08 $2,391.44 $2,842.80

Toy World, Inc. Calculation of Accrued Taxes for 1994 (thousands of dollars)

Accrued Taxes, beg. Taxes Payable on Profits in Month Taxes Paid Accrued Taxes, end

Jan.

Feb.

$88.00 -$60.01 $0.00 $27.99

$27.99 -$55.41 $0.00 -$27.42

Mar. -$27.42 -$52.90 $88.00 -$168.32

Apr. -$168.32 -$56.02 $35.00 -$259.34

May -$259.34 -$57.68 $0.00 -$317.02

Notes: Finished goods (completed) - COGS/12 Taxes paid - $88 (previous year's balance) on March, $35 on April, June, Sep

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

$2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 ### $542.50 $542.50 $542.50 $542.50 $542.50 $542.50 $542.50 $6,510.00 $3,385.30 $3,836.66 $4,275.00 $3,762.88 $3,107.54 $2,256.90 $1,311.87 ### $91.14 $104.16 $1,054.62 $1,197.84 $1,393.14 $1,487.54 $725.87 $6,510.00 $3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 $586.00 ###

June -$317.02 -$59.21 $35.00 -$411.23

July -$411.23 -$58.46 $0.00 -$469.70

Aug. -$469.70 $113.17 $0.00 -$356.52

Sept. -$356.52 $137.66 $35.00 -$253.87

n March, $35 on April, June, September, and December

Oct. -$253.87 $171.59 $0.00 -$82.28

Nov.

Dec.

Total

-$82.28 $190.92 $0.00 $108.64

$108.64 $54.80 $35.00 $128.44

### $268.44 $228.00 ###