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 2022. 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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Net sales Cost of sales (70 percent of sales) Gross profit Operating expenses Toys-4-Kids 2022 Quarterly Pro Forma Forecast ($ thousands) Profit before tax Income taxes Profit after tax Cash (minimum balance = $200,000) Accounts receivable (75 percent of quarterly sales) Inventory (12/31/21 balance = $500,000) Current assets Net plant & equipment Total assets Accounts payable (10 percent of quarterly sales) Accrued taxes (payments quarterly in arrears) Current liabilities Long-term debt Equity (12/31/21 balance = $3,000,000) Total liabilities and equity External financing required Qtr 1 300 210 90 560 Qtr 2 375 263 113 560 (470) (448) (188) (179) (282) 1,235 927 Qtr 3 3,200 2,240 960 560 (269) 240 200 400 160 30 (188) (179) 225 281 2,400 500 500 500 1,960 1,708 3,100 1,000 1,000 1,000 2,960 2,708 4,100 38 320 160 Qtr 4 5,000 3,500 1,500 560 940 376 564 200 3,750 500 4,450 1,000 5,450 500 376 (158) (142) 480 876 400 400 400 400 2,718 2,450 2,690 3,254 2,960 2,708 3,570 4,530 0 0 530 920