9. Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. Below is a quarterly pro forma forecast indicating external financing needs for 2006. 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 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?

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Toys-4-Kids 2006 Quarterly Pro Forma Forecast ($ 000 thousands) Net sales Cost of sales (70% of sales) Gross profit Operating expenses Profit before tax Income taxes Profit after tax Cash (minimum balance = $200,000) Accounts receivable (75% of quarterly sales) Inventory (12/31/05 balance = $500,000) Current assets Net plant and equipment Total assets Accounts payable (10% of quarterly sales) Accrued taxes (payments quarterly in arrears) Current liabilities Long-term debt Equity (12/31/05 balance- $3,000,000) Total liabilities and equity External financing required 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) 400 940 (188) (179) 160 376 $ (282) (269) $ 240 $ 564 $1,235 $ 927 $200 $200 225 281 2,400 3,750 500 500 500 500 1,960 1,990 3,120 4,450 1,000 1,000 1,000 1,000 $2,960 $2,708 $4,100 $5,450 30 38 320 500 (188) (179) 160 376 (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