PROBLEM 10–6 Fax Corporation’s income statement and balance sheet for the year ended December 31, Year 1, are reproduced below:

FAX CORPORATION Income Statement For Year Ended December 31, Year 1 Net sales.......................................................................... $960,000 Cost of goods sold (excluding depreciation) .................... (550,000)

Gross profit...................................................................... 410,000 Depreciation expense....................................................... $ 30,000 Selling and administrative expenses ............................... 160,000 (190,000)

Income before taxes......................................................... 220,000 Income taxes (state and federal) ..................................... (105,600)

Net income....................................................................... $114,400 FAX CORPORATION Balance Sheet December 31, Year 1 Assets Current assets Cash........................................................... $ 30,000 Marketable securities ................................. 5,500 Accounts receivable.................................... 52,000 Inventory..................................................... 112,500 Total current assets.................................... $200,000 Plant and equipment ...................................... 630,000 Less: Accumulated depreciation ..................... (130,000) 500,000 Total assets..................................................... $700,000 Liabilities and Equity Current liabilities Accounts payable ....................................... $ 60,000 Notes payable............................................. 50,000 Total current liabilities ............................... $110,000 Long-term debt ............................................... 150,000 Equity Capital stock .............................................. 250,000 Retained earnings ...................................... 190,000 440,000 Total liabilities and equity............................... $700,000 Additional Information:
1. Purchases in Year 1 are $480,000.
2. In Year 2, management expects 15% sales growth and a 10% increase in all expenses except for depreciation, which increases by 5%.
3. Management expects an inventory turnover ratio of 5.5 for Year 2.
4. A receivable collection period of 90 days, based on year-end accounts receivable, is planned for Year 2.
5. Year 2 income taxes, at the same rate of pretax income for Year 1, will be paid in cash.
6. Notes payable at the end of Year 2 will be $30,000.
7. Long-term debt of $25,000 will be paid in Year 2.
8. FAX desires a minimum cash balance of $20,000 in Year 2.
9. The ratio of accounts payable to purchases for Year 2 is the same as in Year 1.
10. All selling and administrative expenses will be paid in cash in Year 2.
11. Marketable securities and equity accounts at the end of Year 2 are the same as in Year 1.
Required:

a. Prepare a statement of forecasted cash inflows and outflows (what-if analysis) for the year ended December 31, Year 2.

b. Will FAX Corporation have to borrow money in Year 2?