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Corporation Finance
Easy-Turn Toy Company
Easy-Turn is a company that manufactures and sells a particular type of toy to
manufacturers. It has been in business three months and finds itself with more orders
taken than it has the funds to produce the goods on order. The company realizes that it
must find a source of financing and convince this source that the company has a
bright future and that a good source of short-term credit would be the missing
ingredient to make this company a success.
The company’s sales for the first quarter have been 20,000 for January, 30,000 units
for February, and 40,000 units for March. The selling price of the good is $3 per unit
and is sold to its customers offering a discount if paid within the period from sale to
the end of month or net 60 days. 60% of each month’s sales are expected to the
collected in the month following the sale and 8% of each month’s sales are expected
to be collected in the 2nd month following the sale. Credit terms are not expected to
change in the next year from the present credit policy.
The relationship between factory costs and the rate of output are indicated in the
operating statement. Inventories of finished goods, however, are always valued at a
“normal cost” of $2.10 per unit, that is, $2 per unit variable and $0.1 per unit fixed.
The $0.1 per unit fixed is a figure based on the entire year’s production and not one
quarter.
Expected Unit Sales and Production for the next 6 months
Sales
Production
April
30,000
April
50,000
May
40,000
May
60,000
June
50,000
June
60,000
July
50,000
July
70,000
August
60,000
August
80,000
September
70,000
September
90,000
Materials are purchased each month for production and they are paid in the month in
which they are purchased. A safety stock of raw materials is kept on hand to furnish a
30,000 unit production if needed . Cost of supplies and miscellaneous variable and
fixed factory costs are paid in the month in which those costs are incurred.
Direct labor, indirect labor, and supervision costs make up the total factory payroll.
These, as well as selling commissions and expense and all administration costs, are
paid half in the month in which they are incurred, half in the following month. Power
bills are paid in full in the month after are incurred. Property taxes are paid quarterly
and a disbursement of $3,000 will be made for these in April and July.
The company has an arrangement by which it may borrow up to $20,000 for not
longer than 60 days form the Roger County Bank; the bank charges interest at 6
percent per year on such loans, payable at the maturity of the loan. A cash balance of
$4,000 must be maintained. No more cash is to be borrowed than is necessary to
maintain this balance, but loans are made only in full thousands of dollars.
Prepare:
(A) An estimated income statement showing the effects of the expected transactions
for the second quarter and third quarter.
(B) Forecasts of collections from accounts receivable by months and of disbursements
by months.
(C) A summary cash statement, showing the amount of bank loans and the repayment
of them; this statement should also show the expected cash balance at September 30.
(D) An estimate balance sheet showing the expected financial position of the Illinois
Novelty Company at September 30.
(E) Upon completion, you will have three income statements and two balance sheets.
Make a complete comparative financial analysis involving there four statements.
Easy-Turn Toy Company
Income Statement
Quarter ended March 31,1985
Revenue
Gross billing (90,000 units at $3 each )
Less: Provisions for uncollectible acc.
Discount taken by customers
$270,000
$5,400
1,620
7,020
Revenue from operations
$262,980
Expenses
Factory cost of goods (110,000 Units produced)
Materials appropriated to production
Direct labor costs incurred
Factory overhead
Variable costs: Indirect labor
$11,000
Power
4,400
Supplies, Misc
6,600
Fixed Costs: Supervision
6,000
Property Taxes
3,000
Depreciation
3,000
Insurance
300
Miscellaneous
2,700
Total factory costs incurred
Less: Unsold Inventory of finished goods
Factory cost of goods sold
Selling expenses (Which vary proportionately with sales)
Administration costs and expenses (Fixed)
Total Expenses
Net margin from operations
Interest
Earnings before taxes
Income taxes
Net Profit
Easy-Turn Toy Company
$110,000
88,000
22,000
15,000
$ 235,000
42,000
$193,000
45,000
12,000
$250,000
$12,980
750
12,230
6,115
6,115
Balance Sheet
March 31,1985
Cash in bank
Accounts Receivable
Allowance for Uncollectibles
Inventories
Safety Stock
Finished Goods
Prepaid Insurance
Plant and Equipment
Allowance for Depreciation
$2,830
$94,200
5,400
30,000
42,000
190,000
3,000
Total Assets
88,800
72,000
2,100
187,000
$352,730
Liabilities
Factory wages and salaries
Sales Commission and expense
Administration costs accured
Accured property taxes
Accounts payable(Power)
Income taxes payable
Notes payable (6%) 5 year
Capital Stock
Retained Earnings
$23,500
10,000
2,000
3,000
2,000
6,115
50,000
250,000
6,115
Total Liabilities and Equity
$352,730