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Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following list of figures is a quarterly pro forma forecast indicating external financing needs for 2012. Assumptions are in parentheses.
Qtr 3
Qtr 4
Cost of sales (70% of sales)
210
263
2,240
3,500
Gross profit
90
113
960
1,500
Operating expenses
560
Profit before tax
(470)
(448)
400
940
Income taxes
(188)
(179)
160
376
Profit after tax
($ 282)
($ 269)
$ 240
$ 564
Cash (minimum balance = $200,000)
$1,235
$ 927
$ 200
Accounts receivable (75% of quarterly sales)
225
281
2,400
3,750
Inventory (12/31/11 balance = $500,000)
500
Current assets
1,960
1,990
3,120
4,450
Net plant & equipment
1,000
Total assets
$ 2,960
$2,708
$4,100
$5,450
Accounts payable (10% of quarterly sales)
30
38
320
Accrued taxes (payments quarterly in arrears)
Current liabilities
(158)
(142)
480
876
Long-term debt
Equity (12/31/11 balance = $3,000,000)
2,718
2,450
2,690
3,254
Total liabilities and equity
$2,960
$3,570
$4,530
External financing required
$ 0
$ 530
$ 920
a. How do you interpret the negative numbers for income taxes in the first two quarters?
b. Why are cash balances in the first two quarters greater than the minimum required $200,000? How were these numbers determined?
c. How was "external financing required" appearing at the bottom of the forecast determined?
d. Do you think Toys-4-Kids will be able to borrow the external financing required as indicated by the forecast?
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