QuestionAssume ABC Company has asked you to not only prepare their 2013 year-end Balance Sheet but
to also provide pro-forma financial statements for 2014. In addition, they have asked you to
evaluate their company based on the pro-forma statements with regard to ratios. They also want
you to evaluate 3 projects they are considering. Their information is as follows:
End of the year information:
Account
Cash
Accounts Receivable
Inventory
Equipment
Accumulated Depreciation
Accounts Payable
Short-term Notes Payable
Long-term Notes Payable
Common Stock
Retained Earnings
12/31/13
Ending Balance
160,000
126,000
75,200
745,000
292,460
36,900
18,300
157,225
450,000
solve
Additional Information:
Sales for December total 12,000 units. Each months sales are expected to exceed the
prior months results by 5%. The products selling price is $15 per unit.
Company policy calls for a given months ending inventory to equal 80% of the next
months expected unit sales. The December 31 2012 inventory is 9,400 units, which
complies with the policy. The purchase price is $8 per unit.
Sales representatives commissions are 10.0% of sales and are paid in the month of the
sales. The sales managers monthly salary will be $3,500 in January and $4,000 per
month thereafter.
Monthly general and administrative expenses include $8,000 administrative salaries,
$5,000 depreciation, and 0.9% monthly interest on the long-term note payable.
The company expects 30% of sales to be for cash and the remaining 70% on credit.
Receivables are collected in full in the month following the sale (none is collected in the
month of sale).
All merchandise purchases are on credit, and no payables arise from any other
transactions. One months purchases are fully paid in the next month.
The minimum ending cash balance for all months is $140,000. If necessary, the company
borrows enough cash using a short-term note to reach the minimum. Short-term notes
require an interest payment of 1% at each month-end (before any repayment). If the
ending cash balance exceeds the minimum, the excess will be applied to repaying the
short-term notes payable balance.
Dividends of $100,000 are to be declared and paid in February.
No cash payments for income taxes are to be made during the first calendar quarter.
Income taxes will be assessed at 35% in the quarter.
Equipment purchases of $55,000 are scheduled for March.
ABC Companys management is also considering 3 new projects consisting of the purchase
of new equipment. The company has limited resources, and may not be able to complete
make all 3 purchases. The information is as follows for the purchases below.
Project 1
Project 2
Project 3
Purchase Price
$50,000
$75,000
$32,500
Required Rate of Return
12%
8%
10%
Time Period
3 years
5 years
2 years
Cash Flows Year 1
$18,000
$25,000
$20,000
Cash Flows Year 2
$22,000
$20,000
$18,000
Cash Flows Year 3
$22,000
$18,000
N/A
Cash Flows Year 4
N/A
$16,500
N/A
Cash Flows Year 5
N/A
$15,000
N/A
Page 2 of 3
BMAL 530
Required Action:
Part A:
Prepare the year-end balance sheet for 2013. Be sure to use proper headings.
Prepare budgets such that the pro-forma financial statements may be prepared.
Sales budget, including budgeted sales for April.
Purchases budget, the budgeted cost of goods sold for each month and quarter, and the
cost of the March 31 budgeted inventory.
Selling expense budget.
General and administrative expense budget.
Expected cash receipts from customers and the expected March 31 balance of accounts
receivable.
Expected cash payments for purchases and the expected March 31 balance of accounts
payable.
Cash budget.
Budgeted income statement.
Budgeted statement of retained earnings.
Budgeted balance sheet.
Part B:
Calculate using Excel formulas, the NPV of each of the 3 projects.
It is possible that ABC Company may not be able to complete all 3 projects. Therefore,
advise ABC Company as to the order in which they should pursue the projects (i.e.,
which project should ABC Company attempt to do first, second, and last).
Provide justification and analysis as to why you chose the order you did. The analysis
must also be done in Excel, not in a separate document.