Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following is a quarterly pro forma forecast indicating external financing needs for 2018. Assumptions are in parentheses.

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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Toys-4-Kids 2018 Quarterly Pro Forma Forecast ($ thousands) Qtr 1 Qtr 2 Qtr 3 Qtr 4 300 210 Net sales 375 3,200 2,240 5,000 3,500 Cost of sales (70 percent of sales) 263 Gross profit Operating expenses 90 113 960 1,500 560 560 560 560 Profit before tax 940 (470) (188) (448) (179) 400 Income taxes 160 376 (282) 1,235 Profit after tax (269) 240 564 Cash (minimum balance = $200,000) 927 200 200 Accounts receivable (75 percent of quarterly sales) Inventory (12/31/17 balance = $500,000) 225 281 2,400 3,750 500 500 500 500 Current assets 1,960 1,000 2,960 1,708 1,000 2,708 3,100 1,000 4,450 1,000 5,450 Net plant & equipment Total assets 4,100 Accounts payable (10 percent of quarterly sales) Accrued taxes (payments quarterly in arrears) 30 38 320 500 (188) (179) 160 376 Current liabilities (158) 876 (142) 400 480 400 400 Long-term debt Equity (12/31/17 balance = $3,000,000) 400 2,718 2,450 2,690 3,254 Total liabilities and equity 2,960 2,708 3,570 4,530 External financing requlred 530 920