Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. Below is a quarterly pro forma forecast indicating ex- ternal financing needs for 2009. Assumptions are in parentheses. Toys-4-Kids 2009 Quarterly Pro Forma Forecast ($ thousands) Net sales Cost of sales (70% of sales) Gross profit Profit before tax Operating expenses Qtr 1 Qtr 2 Qtr 3 Qtr 4 $ 300 $375 $3,200 $5,000 210 263 2,240 3,500 90 113 960 1,500 560 560 560 560 (470) (448) 400 640 Income taxes Profit after tax Cash (minimum balance $200,000) Accounts receivable (75% of quarterly sales) [188] (179) 160 376 ($ 282] ($ 269) $ 240 $ 564 $1,235 $ 927 $ 200 $200 225 281 2,400 3,750 Inventory [12/31/08 balance - $500,000) 500 500 500 500 Current assets 1,960 1,990 3,12) 4,450 Net plant & equipment 1,000 1,000 1,000 1,000 Total assets $2,960 $2,708 $4 100 $5,450 Accounts payable (10% of quarterly sales) 30 38 320 500 Accrued taxes (payments quarterly in arrears) (188) (179) 160 376 Current liabilities (158 (142) 480 876 Long-term debt 400 400 400 400 Equity (12/31/08 balance = $3,000,000) Total liabilities and equity 2,718 2,450 2,690 3,254 $2,960 $2,703 $3,570 $4,530 External financing required $ 0 $ 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 deter- mined?

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?AppendixLO1