Toy World, Inc. Case Solution

Table A

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 3,597 4,440 5,577 Gross profit $1,616 $1,727 $2,390 Operating expenses 1,199 1,542 1,912 Interest expense 68 75 85 Interest income 20 15 16 Profit before taxes $369 $125 $409 Federal income taxes 125 43 139 Net profit $244 $82 $270

Table B

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

Cash $200 Accounts receivable 2,905 Inventory 586

Current assets $3,691 Plant and equipment, net 1,176

Total assets $4,867

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

Current liabilities $1,172 Long-term debt 400 Shareholders' equity 3,295

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.

Table B

(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

Table C: Monthly Sales Data (thousands of dollars)

Sales Total Jan Feb Mar Apr1993 Actual $7,967 $64 88 96 88 1994 Projected $10,000 $120 140 160 140

Table C

May Jun Jul Aug Sep Oct87 95 96 1,251 1,474 1,723

140 140 160 1,620 1,840 2,140

Table C

Nov Dec1,965 940 2,285 1,115

Exhibit 1

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

ActualDec. 31,

Note 1993 Jan. Feb. Mar.

Cash (a) $200 $878 $1,526 $1,253 Accounts receivable (b) 2,905 1,060 260 300 Inventory (c) 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 Net plant and equipment (d) 1,176 1,176 1,176 1,176

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

Accounts payable (e) $282 $36 $42 $48 Notes payable, bank (f) 752 0 0 0 Accrued taxes (g) 88 31 (23) (162)Long-term debt, current portion 50 50 50 50

Current liabilities $1,172 $117 $69 ($64)Long-term debt (h) 400 400 400 400 Shareholders' equity 3,295 3,183 3,079 2,979

Total liabilities and equity $4,867 $3,700 $3,548 $3,315

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.

Exhibit 1

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

Apr. May June July Aug. Sept.

$1,054 $915 $696 $527 $200 $200 300 280 280 300 1,780 3,460 586 586 586 586 586 586

$1,940 $1,781 $1,562 $1,413 $2,566 $4,246

1,176 1,176 1,176 1,176 1,176 1,176

$3,116 $2,957 $2,738 $2,589 $3,742 $5,422

$42 $42 $42 $48 $486 $552 0 0 0 0 433 1,741

(251) (305) (394) (448) (352) (271)50 50 50 50 50 50

($159) ($213) ($302) ($350) $617 $2,072 400 400 375 375 375 375

2,875 2,770 2,665 2,564 2,750 2,975

$3,116 $2,957 $2,738 $2,589 $3,742 $5,422

(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.

Exhibit 1

Oct. Nov. Dec.

$200 $200 $200 3,980 4,425 3,400

586 586 586

$4,766 $5,211 $4,186

1,176 1,176 1,176

$5,942 $6,387 $5,362

$642 $686 $334 1,745 1,677 942 (126) 33 40

50 50 50

$2,311 $2,446 $1,366 375 375 350

3,256 3,566 3,646

$5,942 $6,387 $5,362

Exhibit 2

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

Jan. Feb. Mar. Apr.

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

Gross profit $36 $42 $48 $42

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

Profit (loss) before taxes ($169) ($158) ($151) ($158)Income taxes(d) (57) (54) (51) (54)

Net Profit ($112) ($104) ($100) ($104)

(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%.

Exhibit 2

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

May June July Aug. Sept. Oct.

$140 $140 $160 $1,620 $1,840 $2,140 98 98 112 1,134 1,288 1,498

$42 $42 $48 $486 $552 $642

200 200 200 200 200 200 4 4 3 5 12 17 3 3 2 1 1 1

($159) ($159) ($153) $282 $341 $426 (54) (54) (52) 96 116 145

($105) ($105) ($101) $186 $225 $281

(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%.

Exhibit 2

Nov. Dec. Total

$2,285 $1,115 $10,000 1,600 780 7,000

$685 $335 $3,000

200 200 2,400 17 14 95

1 1 28

$469 $122 $533 159 42 182

$310 $80 $351

Toy World, Inc.Net Savings from Level Production

Jan. Feb. Mar. Apr.Net Profit (level production) -$116.50 -$107.56 -$102.68 -$108.74Net Profit (seasonal production) -112 -$104.00 -$100.00 -$104.00Net savings from shift to level production -$4.50 -$3.56 -$2.68 -$4.74

May June July Aug. Sept. Oct. Nov. Dec. Total-$111.97 -$114.94 -$113.49 $219.69 $267.22 $333.08 $370.61 $106.37 521.0873-$105.00 -$105.00 -$101.00 $186.00 $225.00 $281.00 $310.00 $80.00 $351.00

-$6.97 -$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.

Cash $620.11 $805.78 $200.00Accounts receivable $1,060.00 $260.00 $300.00Inventory $1,050.38 $1,501.74 $1,940.08 Current assets $2,730.49 $2,567.52 $2,440.08Net plant and equipment $1,176.00 $1,176.00 $1,176.00 Total assets $3,906.49 $3,743.52 $3,616.08

Accounts payable $250.00 $250.00 $250.00Notes payable, bank $0.00 $0.00 $116.14Accrued taxes $27.99 -$27.42 -$168.32Long-term debt, current portion $50.00 $50.00 $50.00 Current liabilities $327.99 $272.58 $247.82Long-term debt $400.00 $400.00 $400.00Shareholders' equity $3,178.50 $3,070.94 $2,968.26 Total liabilities and equity $3,906.49 $3,743.52 $3,616.08check $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


$200.00 $200.00 $200.00 $200.00 $200.00 $200.00$300.00 $280.00 $280.00 $300.00 $1,780.00 $3,460.00

$2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04$2,891.44 $3,322.80 $3,774.16 $4,232.50 $5,200.38 $6,225.04$1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00 $1,176.00$4,067.44 $4,498.80 $4,950.16 $5,408.50 $6,376.38 $7,401.04

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00$767.26 $1,368.27 $2,053.79 $2,684.08 $3,319.10 $3,973.88

-$259.34 -$317.02 -$411.23 -$469.70 -$356.52 -$253.87$50.00 $50.00 $50.00 $50.00 $50.00 $50.00

$807.92 $1,351.25 $1,942.56 $2,514.38 $3,262.58 $4,020.01$400.00 $400.00 $375.00 $375.00 $375.00 $375.00

$2,859.52 $2,747.55 $2,632.61 $2,519.12 $2,738.80 $3,006.02$4,067.44 $4,498.80 $4,950.16 $5,408.50 $6,376.38 $7,401.04

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

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 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

Oct. Nov. Dec.

$200.00 $200.00 $200.00$3,980.00 $4,425.00 $3,400.00$1,714.40 $769.36 $586.00$5,894.40 $5,394.37 $4,186.00$1,176.00 $1,176.00 $1,176.00$7,070.40 $6,570.37 $5,362.00

$250.00 $250.00 $250.00$3,138.58 $2,077.01 $767.47

-$82.28 $108.64 $128.44$50.00 $50.00 $50.00

$3,356.30 $2,485.65 $1,195.91$375.00 $375.00 $350.00

$3,339.10 $3,709.72 $3,816.09$7,070.40 $6,570.37 $5,362.00

$0.00 $0.00 $0.00

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

Jan. Feb. Mar. Apr.

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

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

May June July Aug. Sept. Oct.

$140.00 $140.00 $160.00 $1,620.00 $1,840.00 $2,140.00$91.14 $91.14 $104.16 $1,054.62 $1,197.84 $1,393.14$48.86 $48.86 $55.84 $565.38 $642.16 $746.86

$209.58 $209.58 $209.58 $209.58 $209.58 $209.58$9.36 $13.87 $18.65 $23.38 $28.14 $33.05$0.44 $0.44 $0.44 $0.44 $0.44 $0.44

-$169.65 -$174.15 -$171.95 $332.86 $404.88 $504.67-$57.68 -$59.21 -$58.46 $113.17 $137.66 $171.59

-$111.97 -$114.94 -$113.49 $219.69 $267.22 $333.08

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

Nov. Dec. Total

$2,285.00 $1,115.00 $10,000.00$1,487.54 $725.87 $6,510.00

$797.46 $389.14 $3,490.00$209.58 $209.58 $2,515.00

$26.79 $18.82 $193.01$0.44 $0.44 $7.54

$561.54 $161.17 $789.53$190.92 $54.80 $268.44$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)

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

Jan.

InflowsCollections $1,965.00After-tax interest income $0.44 Total $1,965.44

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

Min cash balance $200.00

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

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

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

$9.25

Interest income 4.00%

Feb. Mar. Apr. May June July

$940.00 $120.00 $140.00 $160.00 $140.00 $140.00$1.36 $1.77 $0.44 $0.44 $0.44 $0.44

$941.36 $121.77 $140.44 $160.44 $140.44 $140.44

$250.00 $250.00 $250.00 $250.00 $250.00 $250.00$0.00 $88.00 $35.00 $0.00 $35.00 $0.00$0.00 $0.00 $0.00 $0.00 $3.34 $0.00

$209.58 $209.58 $209.58 $209.58 $209.58 $209.58$3.61 $3.61 $4.48 $9.36 $13.87 $18.65

$292.50 $292.50 $292.50 $292.50 $292.50 $292.50$755.69 $843.69 $791.56 $761.45 $804.30 $770.73$185.67 -$721.92 -$651.12 -$601.01 -$663.86 -$630.29$620.11 $805.78 $200.00 $200.00 $200.00 $200.00$805.78 $83.86 -$451.12 -$401.01 -$463.86 -$430.29

$0.00 $116.14 $651.12 $601.01 $663.86 $630.29$0.00 $0.00 $0.00 $0.00 $0.00 $0.00

$805.78 $200.00 $200.00 $200.00 $200.00 $200.00

$0.00 $0.00 $116.14 $767.26 $1,368.27 $2,032.13$0.00 -$116.14 -$651.12 -$601.01 -$663.86 -$630.29$0.00 $116.14 $767.26 $1,368.27 $2,032.13 $2,662.42

$450.00 $450.00 $450.00 $450.00 $450.00 $425.00$0.00 $0.00 $0.00 $0.00 $25.00 $0.00

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

$3.61 $3.61 $3.61 $3.61 $3.61 $3.41$0.00 $0.00 $0.87 $5.75 $10.26 $15.24$3.61 $3.61 $4.48 $9.36 $13.87 $18.65

Aug. Sept. Oct. Nov. Dec. Total

$140.00 $160.00 $1,620.00 $1,840.00 $2,140.00 $ 9,505 $0.44 $0.44 $0.44 $0.44 $0.44 $ 8

$140.44 $160.44 $1,620.44 $1,840.44 $2,140.44 $ 9,513

$250.00 $250.00 $250.00 $250.00 $250.00$0.00 $35.00 $0.00 $0.00 $35.00$0.00 $0.00 $0.00 $0.00 $4.55

$209.58 $209.58 $209.58 $209.58 $209.58$23.38 $28.14 $33.05 $26.79 $18.82

$292.50 $292.50 $292.50 $292.50 $292.50$775.46 $815.22 $785.13 $778.87 $810.45

-$635.02 -$654.78 $835.31 $1,061.57 $1,329.99$200.00 $200.00 $200.00 $200.00 $200.00

-$435.02 -$454.78 $1,035.31 $1,261.57 $1,529.99$635.02 $654.78 $0.00 $0.00 $0.00

$0.00 $0.00 $835.31 $1,061.57 $1,329.99$200.00 $200.00 $200.00 $200.00 $200.00

200

$2,662.42 $3,297.44 $3,952.23 $3,116.92 $2,055.35-$635.02 -$654.78 $835.31 $1,061.57 $1,329.99

$3,297.44 $3,952.23 $3,116.92 $2,055.35 $725.36

$425.00 $425.00 $425.00 $425.00 $425.00$0.00 $0.00 $0.00 $0.00 $25.00

$425.00 $425.00 $425.00 $425.00 $400.00

$3.41 $3.41 $3.41 $3.41 $3.41$19.97 $24.73 $29.64 $23.38 $15.42$23.38 $28.14 $33.05 $26.79 $18.82

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

Jan. Feb. Mar.

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

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

Jan. Feb. Mar.

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

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


$1,940.08 $2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38$542.50 $542.50 $542.50 $542.50 $542.50 $542.50

$2,482.58 $2,933.94 $3,385.30 $3,836.66 $4,275.00 $3,762.88$91.14 $91.14 $91.14 $104.16 $1,054.62 $1,197.84

$2,391.44 $2,842.80 $3,294.16 $3,732.50 $3,220.38 $2,565.04


-$168.32 -$259.34 -$317.02 -$411.23 -$469.70 -$356.52-$56.02 -$57.68 -$59.21 -$58.46 $113.17 $137.66$35.00 $0.00 $35.00 $0.00 $0.00 $35.00

-$259.34 -$317.02 -$411.23 -$469.70 -$356.52 -$253.87

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

Oct. Nov. Dec. Total

$2,565.04 $1,714.40 $769.36 $25,608.29$542.50 $542.50 $542.50 $6,510.00

$3,107.54 $2,256.90 $1,311.86 $32,118.29$1,393.14 $1,487.54 $725.87 $6,510.00$1,714.40 $769.36 $586.00 $25,608.29

Oct. Nov. Dec. Total

-$253.87 -$82.28 $108.64 -$2,121.08$171.59 $190.92 $54.80 $268.44

$0.00 $0.00 $35.00 $228.00-$82.28 $108.64 $128.44 -$2,080.64

Toy World, Inc. Case Solution

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