Toy World, Inc. Case Solution

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. September.ril. The . vious year's tax. June. 000 Jan $64 $120 Feb 88 140 Mar 96 160 Apr 88 140 May 87 140 .Table C: Monthly Sales Data (thousands of dollars) Sales 1993 Actual 1994 Projected Total $7.967 $10. Jun 95 140 Jul 96 160 Aug 1251 1620 Sep 1474 1840 Oct 1723 2140 Nov 1965 2285 Dec 940 1115 . current portion Current liabilities Long-term debt Shareholders' equity $200 2905 586 (h) $282 752 88 50 $1. .172 400 3295 $4. bank (f) Accrued taxes (g) Long-term debt. 31. 1994 (thousands of dollars) Note Cash Accounts receivable Inventory Current assets Net plant and equipment Actual Dec.000) for its estimate and making any adjusting tax payments in 1995. In estimating its tax liability for 1994.524 1176 Mar.867 Jan. (d)Assumed equipment purchases equal to depreciation expense.548 $3.000 for 1 This represents a 30-day payment period. 1993 level for all of 1994.700 $3. June 15. 1994.691 (d) Total assets Total liabilities and equity 1176 $4.000 in April.526 260 586 $1.054 300 586 $2. Feb.000 balance. and Dec each of the estimated tax for 1994 are due. $878 1060 586 $2. the company cou Toy World planned to use its prior year's tax liability as its estimate and to pay $35. includes excess cash in months when company is o (b)Assumed 60-day collection period. Apr.253 300 586 $1. September 15. $1.315 $3. Septem (h)To be repaid at the rate of $25. (g)Taxes payable on 1993 income are due on March 15.000 each June and December.Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production.116 Notes: (a)Assumed maintenance of minimum $200.867 Accounts payable (e) Notes payable.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 $3.548 $3. On April 15. Alternatively. June.700 $3.940 1176 1176 1176 $3.000.139 $1. (c)Assumed inventories maintained at December 31. purchases will follow seasonal produc (f)Plug figure.372 $2. (e)Assumed equal to 30% of the current month's sales and related to material purchases of $3.315 $3. the company has the opti ($139. 1993 (a) (b) (c) $3. Since inventories are level. 446 375 3566 $5.thousands of dollars) May June $915 280 586 $1.781 1176 July $696 280 586 $1.942 $6. $200 3460 586 $4. $200 1780 586 $2. 1994. September. June.738 Sept.589 $42 $42 $48 -305 50 -394 50 ($213 400 2770 ($302 375 2665 $2.311 375 3256 $2. $527 300 586 $1. .957 $2.246 1176 $5.000 for 1994 as against sales of $10 million. and December 15. and December.942 $200 4425 586 $5.738 $2.742 onths when company is out of debt. $200 3980 586 $4.413 1176 $2.072 375 2975 $2.000.422 Nov. 00 in April.957 $2.211 1176 $6. ases of $3.562 1176 Aug.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. follow seasonal production September 15.742 Oct.387 $2. the company could estimate its 1994 tax liability directly. payments of 25% e company has the option of using the prior year's tax liability tively.589 $3.422 $5.766 1176 $5.566 1176 $3. 362 .186 1176 $5.366 350 3646 $5.362 $334 942 40 50 $1. $200 3400 586 $4.Dec. Mar. 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. Apr.Exhibit 2 Pro Forma Income Statement Under Seasonal Production. 1994 (thousands of dollars) Jan. and reduced accrued taxes shown on balance shee . (b)Assumed to be same for each month throughout the year. Net sales Cost of goods sold(a) Gross profit Operating expenses(b) Interest expense Interest income(c) Feb. (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. $2. es shown on balance sheet. $1. $2.840 1288 $552 Oct.ands of dollars) June July Aug. Nov. .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. $140 98 $160 112 $42 $48 Sept.285 1600 $685 $1.620 1134 $486 $1.140 1498 $642 Dec. The federal tax rate on all earnings was 34%. 000 2400 95 28 $533 182 $351 .Total $10.000 7000 $3. May -$116. Feb.50 -$107.Toy World.68 -$108.68 -$4.97 .00 -$104. Mar.00 -$4.97 -112 -$104.74 -$6. Apr.50 -$3.74 -$111.56 -$102.00 -$100. Inc. Net Savings from Level Production Net Profit (level production) Net Profit (seasonal production) Net savings from shift to level production Jan.00 -$105.56 -$2. 00 -$9.09 .69 $267. Total -$114.61 $26.00 $225.00 $281.June July Aug.08 $60.49 $219.00 $310.00 -$101.37 $170.22 $333.69 $42.49 $33.61 $106.94 -$12.22 $52.00 $186.00 $80.37 521.94 -$113. Nov.00 $351. Dec. Oct.09 -$105. Sept.08 $370. 176.859.00 Notes: Accounts receivable . 1994 (thousand of dollars) Jan.906.968.80 $1. Feb.99 -$27.00 $3.00 $3.44 $4.58 $247.52 $2.440. May Cash Accounts receivable Inventory Current assets Net plant and equipment Total assets $620. Apr.00 $300.730.176.000. Pro Forma Balance Sheets Under Level Production.178.940.747.070.00 $400.00 $1.391.82 $807.00 $50.067.00 $250.842.322.00 $0. bank Accrued taxes Long-term debt.74 $2.176.30% of sales ($3.42 -$168.00 $50.498.26 $1.78 $260.Toy World.$50 Long-term debt .000/12) = $250.08 $200.44 $2.00 $116.00 $0.00 $2.52 $200.14 $767.80 $0.50 $3.80 Accounts payable Notes payable.55 $3.00 $0.38 $2.Balancing figure Long-term debt (current portion) .32 -$259.00 $4. Mar.00 $0.26 $2.616.94 $2.743.498.00 $250.49 $3.176.49 $805.368.52 $3.00 $50.00 $400.08 $1.02 $50. Inc.906.616.Equal to depreciation expense Accounts payable .34 -$317.00 $1.567.060.$400 as of December 1993.176.Sales of the last two months Net plant and equipment .743. current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and equity check $250.Beginning equity + net income (loss) per month .00 $3.00 $3.08 $4.501.92 $1.00 $250.00 $2.00 $327.11 $1. with $25 being paid off ever Shareholders' equity .00 $50.44 $200.08 $2.00 $1.00 $280.00 $400.00 $250.00 $300.25 $400.00 $4.44 $1.49 $1.27 $27.000 per month Notes payable .891.80 $3.52 $1.351.00 $0.00 $400.99 $272.00 $0.067.050. 65 $1.00 $3.00 $1.16 $3.00 $3.200.376.00 $2.980.570.00 $2.44 $50.64 $128.00 $5.425.00 $0.020.38 $0.709.00 $2.714.79 -$411.519.47 $108.356.195.56 $375.339.00 $350.00 $250.87 $50.00 $3.00 $250.50 $200.00 $6.00 $4.942.00 $280.262.006.10 $7.00 $6.408.00 $50.00 $2.40 $0.732.460.00 $586.774.077.37 $5.000 per month . with $25 being paid off every June and December t income (loss) per month .070.38 $5.52 $50.00 $250.80 $6.220.738.00 $3.40 $5.38 $200.632.894.61 $4. Oct.394.00 $769.070.00 $3. Nov.50 $0.408.30 $375.362.40 $1. Sept.00 $3.38 $375.176.570.00 $4.04 $1.816.176.01 $375.00 $3.40 $200.138.09 $6.00 $250.186.00 $1.950.376.50 $1.70 $50.00 $250.16 $1.00 $0.04 $6.00 $3.973.176.37 $200.04 $200.00 tion expense 0/12) = $250. $200.00 $3.00 $250.176.16 $200.00 $5.04 $0.91 $375.00 $4.514.00 $3.00 $250.10 -$356.00 $3.362.400.00 $4.00 $3.50 $4.00 $7.053.780.23 $50.176.28 $50. Dec.319.565.12 $5.00 $1.38 $1.225.June July Aug.58 -$82.00 $2.00 $1.08 -$469.01 $767.176.401.00 $2.02 $7.00 $3.232.294.37 $5.00 $300.72 $3.00 $7.37 $1.58 $375.00 $2.16 $0.401.950.88 -$253.485.684.00 $2.176.00 $3.00 $2. $160. $140.14 $48.21 -$114.1% of net sales per month Operating expenses .15 -$59.12 $41.77 -$155.56 Mar. Inc.00 $91.58 $3.88 $209.02 -$108.00 $91.90 -$102.58 -$52.61 $1.65 -$57.68 Apr.400 annually under seasonal production+ $ 1 Interest expense Interest income Income taxes .00 $104.61 $1.76 -$56.97 June $140.41 -$107.00 $91.44 -$164.48 $0.14 $48.58 $9.36 $0.65.36 -$162.86 $209.00 $91.97 -$55.14 $48.84 $209.58 $13.16 $55.34% of profit (loss) before taxes .Estimated 1994 net sales per month COGS .44 -$176.51 -$60.58 $9.87 $0.14 $48.58 $3.68 -$111. Pro Forma Income Statement Under Level Production.94 Notes: Net sales .44 -$169.74 May $140. 1994 (thousands of dollars) Jan.86 $209.Toy World.58 $4. Net sales Cost of goods sold Gross profit Operating expenses Interest expense Interest income Profit (loss) before taxes Income taxes Net Profit $120.86 $209.86 $209.$200*12 = $2.50 Feb.01 -$116. $140.25 $0.00 $78.44 -$174. Oct.44 $0.620.65 $23.00 $2.05 $26.17 $789.01 $0.86 $404.44 $0.14 $1.38 $28.37 $521.87 $6.00 $2.92 $54.58 $2.84 $565.00 $209.38 $642.00 $1. Dec.88 $504.490.July Aug.00 $55.08 $370.16 $746.44 $7.54 $161.58 $209.49 $219.84 $1.00 $18.69 $267.82 $193.67 $561.515 annually ($209.00 $1.95 $332.515.00 ### $104.62 $1.09 r seasonal production+ $ 115 additional storage/handling costs = $2.46 $113.197.487.58 $209.44 $0.54 -$171.285.58 $209.22 $333.14 $33.44 $0.58 $209.86 $797.115.66 $171.510.44 $0.00 $1.140.80 $268.840.53 -$58.58 $209.17 $137. Sept.16 $1.59 $190.393.47 $389. Total $160.44 -$113. Nov.054.61 $106.58 monthly) .14 $3.79 $18.54 $725. 8 monthly) . 36 $120.00 $450.61 Interest Expense on long-term debt on notes payable Interest income 9.00 $450.00% .172.44 $1.00 $450.00 $0.14 $0.00 $3.625% 9.00 $752.00 $0.00 $805.00 $209.44 $940.00 $209.00 $3.00 $1.14 $116.965.64 $9.11 $200.00 -$116.58 $3.50 $793. Availment (Repayment) Loan balance.00 $1.61 $292.50 $755.61 $0.25 $292.00 $0.11 $0.00 $450.61 $5.67 $620.77 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 $282.14 Long-term debt Balance.Toy World.86 $116.00 $200. beg.00 $1.00 $88.00 Loan balance. Cash Budget Under Level Productions.965.58 $3.00 $620.372.00 $0.61 $292.00 $0.58 $9.00 $450.00 $3.00 $0. Mar.61 $3.61 $0. end $752.33 $1. 1994 (thousands of dollars) Jan.92 $805.00 $0.00 $0.77 $121. Feb. Inc.69 -$721.00 $752.78 $83.000% 4.00 $0.50 $843. Repayment Balance. end $450.78 $250.11 $250.00 $0.78 $0.00 $0.11 $805.00 Min cash balance $200. beg.69 $185.00 $0. Inflows Collections After-tax interest income Total $1.25 $3.00 $0.36 $941.00 $209.00 $0.00 $0. 36 $292.50 $292.00 $3.86 $0.45 -$601.42 $3.00 $0.368.56 -$651.46 -$635.00 $450.26 $13.00 $425.79 .78 $835.00 $250.44 $250.840.73 $28.61 $5.58 $23.061.29 -$635.00 $0.00 $425.00 $0.00 $0.00 $425.44 $140.12 $200.31 $1.31 $1.50 $292.02 $635.Apr.41 $15.78 $835.34 $209.57 $200.26 $1.00 $0.032.13 $778.00 $0.840.00 $200.58 $209.00 $0.29 $200.57 $767.73 -$630.00 $0.44 $140.00 $200.01 $0.50 $775.57 $654.00 $209.44 $160.48 $292.14 $3.00 $200.29 $630.65 $3.87 -$654.41 $23. May June July Aug.12 $651.92 $2.44 $160.00 -$430.00 $0.00 $250.00 $250.00 -$463. Sept.41 $24.42 $3.055.00 $0.44 $0.22 $785.116.00 $3.00 $425.620.00 $425.00 $209.00 $250.61 $0.00 $425.297.00 $200.00 $200.061.44 $140.00 $25.86 -$630.75 $9.00 $0.58 $28.00 $0.44 $140.27 $2.00 $0.58 $209.14 $33.00 $35.116.00 $0.00 $0.00 $209.01 -$663.31 $1.620.78 $1.31 $1.44 $3.952.00 $250.00 $835.41 $19.36 $3.58 $9.50 $815.44 $140.00 -$454.61 $10.00 $0.86 $200.58 $4.27 $2.86 $663.44 $3.13 $2.00 $425.00 $200.05 $3.58 $18.44 $140.02 $0.00 $450.00 -$451.00 $35.87 $4.87 $3.00 -$401.12 -$601.00 $116.50 $770.64 $33.44 $1.00 $425.00 $35.00 $0.65 $292.261.035.00 $200.29 $0.00 $209.41 $29.79 $292. Oct.00 $1.12 $0.00 $200.00 $250.50 $804.23 $3.92 -$651.44 $140.00 $209.48 $3.02 -$654.368.02 $200.14 $767.50 $791.44 $0.00 $0.00 $0.13 $2.00 $425.00 $0.44 $1.662.00 -$435.38 $3.97 $23.00 $450.58 $13.44 $160.44 $160.00 $0.78 $0.00 $200. $140. Nov.032.23 $3.00 $425.297.662.05 $26.952.01 $200.24 $18.38 $26.00 $250.00 $425.50 $761.57 $200.01 $601.26 $1.00 $0.00 $0.00 $0.30 -$663.00 $0.35 $450.00 $0.87 $292.00 $450.00 $1.38 $292.061.00 $0. 329.140.41 $15.529.Dec.99 $0.00 $4.00 200 $2.00 $25.82 .45 $1.329.00 $1.055.99 $725.55 $209.99 $200.35 $1.50 $810.99 $200.44 $2.42 $18.36 $425. $2.58 $18.44 Total 9.513 $250.00 $1.00 $400.140.82 $292.329.00 $0.00 $35.00 $3.505 8 9. 128. June.501. $1. May Finished Goods.$88 (previous year's balance) on March.14 Finished Goods. Apr.Toy World.050.50 Finished Goods Available for Sale$1.74 $1.42 -$52.41 $0. -$27.00 -$27.34 May -$259.00 -$168.50 $542. Inc.482.933. Feb.592.68 $0.24 $2. $586.02 $35.16 $91.00 -$317. Mar. -$168.99 $27. End.50 $542. end Jan.34 -$57.42 Mar.391.050. Taxes Payable on Profits in Month Taxes Paid Accrued Taxes.940.044.08 $2.50 $542.00 -$60.940.08 $2.80 Toy World.14 $91.00 -$259. $35 on April.32 Apr.74 $1. Sep .14 $104.00 $1. Calculation of Accrued Taxes for 1994 (thousands of dollars) Accrued Taxes. $88.391.38 $1.58 $2.12 $91.COGS/12 Taxes paid . Inc.02 Notes: Finished goods (completed) .90 $88.99 -$55.842.00 $27.50 $542.38 $1.94 Cost of Goods Sold $78.01 $0.88 $2.50 $1.44 Finished Goods Completed $542. Schedule of Changes Affecting Inventory.501.32 -$56. 1994 (thousands of dollars) Jan.44 $2. Feb. Beg. beg. 50 $542.50 $3.732. -$469.04 $1.16 $3.00 -$356.220.92 $0.385. September.714.00 $3.732.54 $2.00 ### .294.38 $2.64 $54.70 Aug.37 ### $542. Nov.50 $542. Total $2.00 -$411.393.38 $2.836.256.16 $1.87 ### $91.00 $3. Sept.80 $35.54 $725.054.00 $128.28 $190.37 $586.714.87 $6.50 $6.50 $542.40 $769.14 $1.21 $35. Dec.June July Aug. $35 on April.80 $3.40 $769.00 -$469. Oct.510.23 July -$411.565.275.02 -$59.87 n March.59 $0.30 $3.88 $3.66 $4.16 $3.842.510.90 $1.487.50 $3.62 $1.50 $542.04 $1. Total -$82.294.220.762.00 -$82.50 $542.17 $0.52 $137.565.50 $542.66 $35.00 $108.00 $3.00 ### June -$317.23 -$58.84 $1.52 Sept.00 -$253.197. Dec. and December Oct.14 $104.28 Nov.46 $0.107.70 $113. June. -$356.64 $108. -$253.87 $171.44 ### $268.44 $228.311.