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

1991 1992 1993

Net sales $5,213 $6,167 $7,967 Cost of goods sold 3597 4440 5577Gross profit $1,616 $1,727 $2,390 Operating expenses 1199 1542 1912Interest expense 68 75 85Interest income 20 15 16Profit before taxes $369 $125 $409 Federal income taxes 125 43 139Net profit $244 $82 $270

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

Cash $200 Accounts receivable 2905Inventory 586

Current assets $3,691 Plant and equipment, net 1176

Total assets $4,867

Accounts payable $282 Notes payable, bank 752Accrued taxes(a) 88Long-term debt, current portion 50

Current liabilities $1,172 Long-term debt 400Shareholders' equity 3295

Total liabilities and shareholders' equity $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.

(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

Table C: Monthly Sales Data (thousands of dollars)

Sales Total Jan Feb Mar Apr May1993 Actual $7,967 $64 88 96 88 871994 Projected $10,000 $120 140 160 140 140

Jun Jul Aug Sep Oct Nov Dec95 96 1251 1474 1723 1965 940

140 160 1620 1840 2140 2285 1115

Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

ActualDec. 31,

Note 1993 Jan. Feb. Mar. Apr.

Cash (a) $200 $878 $1,526 $1,253 $1,054 Accounts receivable (b) 2905 1060 260 300 300Inventory (c) 586 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 $1,940 Net plant and equipment (d) 1176 1176 1176 1176 1176

Total assets $4,867 $3,700 $3,548 $3,315 $3,116

Accounts payable (e) $282 $36 $42 $48 $42 Notes payable, bank (f) 752Accrued taxes (g) 88 31 -23 -162 -251Long-term debt, current portion 50 50 50 50 50

Current liabilities $1,172 $117 $69 ($64 ($159Long-term debt (h) 400 400 400 400 400Shareholders' equity 3295 3183 3079 2979 2875

Total liabilities and equity $4,867 $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 out of debt.

(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 1994 as against sales of $10 million. This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal production

(f)Plug figure.

(g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the option of using the prior year's tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company could estimate its 1994 tax liability directly. Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, September, and December.

(h)To be repaid at the rate of $25,000 each June and December.

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

May June July Aug. Sept. Oct. Nov.

$915 $696 $527 $200 $200 $200 $200 280 280 300 1780 3460 3980 4425586 586 586 586 586 586 586

$1,781 $1,562 $1,413 $2,566 $4,246 $4,766 $5,211

1176 1176 1176 1176 1176 1176 1176

$2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387

$42 $42 $48 $486 $552 $642 $686 433 1741 1745 1677

-305 -394 -448 -352 -271 -126 3350 50 50 50 50 50 50

($213 ($302 ($350 $617 $2,072 $2,311 $2,446 400 375 375 375 375 375 375

2770 2665 2564 2750 2975 3256 3566

$2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387

(a)Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt.

(e)Assumed equal to 30% of the current month's sales and related to material purchases of $3,000,000 for 1994 as against sales of $10 million. This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal production

(g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the option of using the prior year's tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company could estimate its 1994 tax liability directly. Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, September, and December.

Dec.

$200 3400

586

$4,186

1176

$5,362

$334 942

4050

$1,366 350

3646

$5,362

Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May

Net sales $120 $140 $160 $140 $140 Cost of goods sold(a) 84 98 112 98 98

Gross profit $36 $42 $48 $42 $42

Operating expenses(b) 200 200 200 200 200Interest expense 7 4 4 4 4Interest income(c) 2 4 5 4 3

Profit (loss) before taxes ($169 ($158 ($151 ($158 ($159Income taxes(d) -57 -54 -51 -54 -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 sheet. The federal tax rate on all earnings was 34%.

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

June July Aug. Sept. Oct. Nov. Dec.

$140 $160 $1,620 $1,840 $2,140 $2,285 $1,115 98 112 1134 1288 1498 1600 780

$42 $48 $486 $552 $642 $685 $335

200 200 200 200 200 200 2004 3 5 12 17 17 143 2 1 1 1 1 1

($159 ($153 $282 $341 $426 $469 $122 -54 -52 96 116 145 159 42

($105 ($101 $186 $225 $281 $310 $80

(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 sheet. The federal tax rate on all earnings was 34%.

Total

$10,000 7000

$3,000

24009528

$533 182

$351

Toy World, Inc.Net Savings from Level Production

Jan. Feb. Mar. Apr. MayNet Profit (level production) -$116.50 -$107.56 -$102.68 -$108.74 -$111.97Net Profit (seasonal production) -112 -$104.00 -$100.00 -$104.00 -$105.00Net savings from shift to level production -$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 $620.11 $805.78 $200.00 $200.00 $200.00Accounts receivable $1,060.00 $260.00 $300.00 $300.00 $280.00Inventory $1,050.38 $1,501.74 $1,940.08 $2,391.44 $2,842.80 Current assets $2,730.49 $2,567.52 $2,440.08 $2,891.44 $3,322.80Net plant and equipment $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 Total assets $3,906.49 $3,743.52 $3,616.08 $4,067.44 $4,498.80

Accounts payable $250.00 $250.00 $250.00 $250.00 $250.00Notes payable, bank $0.00 $0.00 $116.14 $767.26 $1,368.27Accrued taxes $27.99 -$27.42 -$168.32 -$259.34 -$317.02Long-term debt, current portion $50.00 $50.00 $50.00 $50.00 $50.00 Current liabilities $327.99 $272.58 $247.82 $807.92 $1,351.25Long-term debt $400.00 $400.00 $400.00 $400.00 $400.00Shareholders' equity $3,178.50 $3,070.94 $2,968.26 $2,859.52 $2,747.55 Total liabilities and equity $3,906.49 $3,743.52 $3,616.08 $4,067.44 $4,498.80check $0.00 $0.00 $0.00 $0.00 $0.00

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

June July Aug. Sept. Oct. Nov. Dec.

$200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00$280.00 $300.00 $1,780.00 $3,460.00 $3,980.00 $4,425.00 $3,400.00

$3,294.16 $3,732.50 $3,220.38 $2,565.04 $1,714.40 $769.37 $586.00$3,774.16 $4,232.50 $5,200.38 $6,225.04 $5,894.40 $5,394.37 $4,186.00$1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00$4,950.16 $5,408.50 $6,376.38 $7,401.04 $7,070.40 $6,570.37 $5,362.00

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00$2,053.79 $2,684.08 $3,319.10 $3,973.88 $3,138.58 $2,077.01 $767.47-$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 $128.44

$50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00$1,942.56 $2,514.38 $3,262.58 $4,020.01 $3,356.30 $2,485.65 $1,195.91

$375.00 $375.00 $375.00 $375.00 $375.00 $375.00 $350.00$2,632.61 $2,519.12 $2,738.80 $3,006.02 $3,339.10 $3,709.72 $3,816.09$4,950.16 $5,408.50 $6,376.38 $7,401.04 $7,070.40 $6,570.37 $5,362.00

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Net plant and equipment - Equal to depreciation expenseAccounts payable - 30% of sales ($3,000,000/12) = $250,000 per month

Long-term debt - $400 as of December 1993, with $25 being paid off every June and DecemberShareholders' equity - Beginning equity + net income (loss) per month

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

Jan. Feb. Mar. Apr. May June

Net sales $120.00 $140.00 $160.00 $140.00 $140.00 $140.00Cost of goods sold $78.12 $91.14 $104.16 $91.14 $91.14 $91.14Gross profit $41.88 $48.86 $55.84 $48.86 $48.86 $48.86Operating expenses $209.58 $209.58 $209.58 $209.58 $209.58 $209.58Interest expense $9.25 $3.61 $3.61 $4.48 $9.36 $13.87Interest income $0.44 $1.36 $1.77 $0.44 $0.44 $0.44Profit (loss) before taxes -$176.51 -$162.97 -$155.58 -$164.76 -$169.65 -$174.15Income taxes -$60.01 -$55.41 -$52.90 -$56.02 -$57.68 -$59.21Net Profit -$116.50 -$107.56 -$102.68 -$108.74 -$111.97 -$114.94

Notes:Net sales - Estimated 1994 net sales per monthCOGS - 65.1% of net sales per monthOperating expenses - $200*12 = $2,400 annually under seasonal production+ $ 115 additional storage/handling costs = $2,515 annually ($209.58 monthly)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

Operating expenses - $200*12 = $2,400 annually under seasonal production+ $ 115 additional storage/handling costs = $2,515 annually ($209.58 monthly)

Operating expenses - $200*12 = $2,400 annually under seasonal production+ $ 115 additional storage/handling costs = $2,515 annually ($209.58 monthly)

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

Jan. Feb. Mar.

InflowsCollections $1,965.00 $940.00 $120.00After-tax interest income $0.44 $1.36 $1.77 Total $1,965.44 $941.36 $121.77

OutflowsPayments of accounts payable $282.00 $250.00 $250.00Tax payments $0.00 $0.00 $88.00Repayment of long-term debt $0.00 $0.00 $0.00Operating expenses $209.58 $209.58 $209.58Interest expense $9.25 $3.61 $3.61Wages $292.50 $292.50 $292.50 Total $793.33 $755.69 $843.69Net inflow (outflow) $1,172.11 $185.67 -$721.92Beginning cash $200.00 $620.11 $805.78Ending cash before any loan increase or repayment $1,372.11 $805.78 $83.86Loan availment $0.00 $0.00 $116.14Loan repayment $752.00 $0.00 $0.00End-of-month cash balance $620.11 $805.78 $200.00

Min cash balance $200.00

Loan balance, beg. $752.00 $0.00 $0.00Availment (Repayment) $752.00 $0.00 -$116.14Loan balance, end $0.00 $0.00 $116.14

Long-term debtBalance, beg. $450.00 $450.00 $450.00Repayment $0.00 $0.00 $0.00Balance, end $450.00 $450.00 $450.00

Interest Expense on long-term debt 9.625% $3.61 $3.61 $3.61 on notes payable 9.000% $5.64 $0.00 $0.00

$9.25 $3.61 $3.61

Interest income 4.00%

Apr. May June July Aug. Sept. Oct. Nov.

$140.00 $160.00 $140.00 $140.00 $140.00 $160.00 $1,620.00 $1,840.00$0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44

$140.44 $160.44 $140.44 $140.44 $140.44 $160.44 $1,620.44 $1,840.44

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00 $250.00$35.00 $0.00 $35.00 $0.00 $0.00 $35.00 $0.00 $0.00

$0.00 $0.00 $3.34 $0.00 $0.00 $0.00 $0.00 $0.00$209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $209.58 $209.58

$4.48 $9.36 $13.87 $18.65 $23.38 $28.14 $33.05 $26.79$292.50 $292.50 $292.50 $292.50 $292.50 $292.50 $292.50 $292.50$791.56 $761.45 $804.30 $770.73 $775.46 $815.22 $785.13 $778.87

-$651.12 -$601.01 -$663.86 -$630.29 -$635.02 -$654.78 $835.31 $1,061.57$200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00 $200.00

-$451.12 -$401.01 -$463.86 -$430.29 -$435.02 -$454.78 $1,035.31 $1,261.57$651.12 $601.01 $663.86 $630.29 $635.02 $654.78 $0.00 $0.00

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $835.31 $1,061.57$200.00 $200.00 $200.00 $200.00 $200.00 $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 $450.00 $450.00 $425.00 $425.00 $425.00 $425.00 $425.00$0.00 $0.00 $25.00 $0.00 $0.00 $0.00 $0.00 $0.00

$450.00 $450.00 $425.00 $425.00 $425.00 $425.00 $425.00 $425.00

$3.61 $3.61 $3.61 $3.41 $3.41 $3.41 $3.41 $3.41$0.87 $5.75 $10.26 $15.24 $19.97 $24.73 $29.64 $23.38$4.48 $9.36 $13.87 $18.65 $23.38 $28.14 $33.05 $26.79

Dec. Total

$2,140.00 9,505 $0.44 8

$2,140.44 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 $2,391.44Finished Goods Completed $542.50 $542.50 $542.50 $542.50 $542.50Finished Goods Available for Sale$1,128.50 $1,592.88 $2,044.24 $2,482.58 $2,933.94Cost of Goods Sold $78.12 $91.14 $104.16 $91.14 $91.14Finished 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)

Jan. Feb. Mar. Apr. May

Accrued Taxes, beg. $88.00 $27.99 -$27.42 -$168.32 -$259.34Taxes Payable on Profits in Month -$60.01 -$55.41 -$52.90 -$56.02 -$57.68Taxes Paid $0.00 $0.00 $88.00 $35.00 $0.00Accrued Taxes, end $27.99 -$27.42 -$168.32 -$259.34 -$317.02

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

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 July Aug. Sept. Oct. Nov. Dec. Total

-$317.02 -$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 ###-$59.21 -$58.46 $113.17 $137.66 $171.59 $190.92 $54.80 $268.44$35.00 $0.00 $0.00 $35.00 $0.00 $0.00 $35.00 $228.00

-$411.23 -$469.70 -$356.52 -$253.87 -$82.28 $108.64 $128.44 ###

Taxes paid - $88 (previous year's balance) on March, $35 on April, June, September, and December