Preparing New Forecasts This spreadsheet assignment is a continuation of the spreadsheet assignments given in earlier chapters. If you completed those spreadsheets, you have a head start on this one.

1. Handyman wishes to prepare a forecasted balance sheet and income statement for 2010. Use the original financial statement numbers for 2009 [given in part (1) of the Cumulative Spreadsheet Project assignment in Chapter 2] as the basis for the forecast, along with the following additional information:

a. Sales in 2010 are expected to increase by 40% over 2009 sales of $700.

b. Cash will increase at the same rate as sales.

c. The forecasted amount of accounts receivable in 2010 is determined using the forecasted value for the average collection period. For simplicity, do the computations using the end-of-period accounts receivable balance instead of the average balance.

The average collection period for 2010 is expected to be 14.08 days.

d. The forecasted amount of inventory in 2010 is determined using the forecasted value for the number of days’ sales in inventory (computed using the end-of-period inventory balance). The number of days’ sales in inventory for 2010 is expected to be 107.6 days.

e. The forecasted amount of accounts payable in 2010 is determined using the forecasted value for the number of days’ purchases in accounts payable (computed using the end-of-period accounts payable balance). The number of days’ purchases in accounts payable for 2010 is expected to be 48.34 days.

f. The $160 in operating expenses reported in 2009 breaks down as follows: $5 depreciation expense, $155 other operating expenses.

g. New long-term debt will be acquired (or repaid) in an amount sufficient to make Handyman’s debt ratio (total liabilities divided by total assets) in 2010 exactly equal to 0.80.

h. No cash dividends will be paid in 2010.

i. New short-term loans payable will be acquired in an amount sufficient to make Handyman’s current ratio in 2010 exactly equal to 2.0.

j. The forecasted amount of property, plant, and equipment (PP&E) in 2010 is determined using the forecasted value for the fixed asset turnover ratio. For simplicity, compute the fixed asset turnover ratio using the end-of-period gross PP&E balance.

The fixed asset turnover ratio for 2010 is expected to be 3.518 times.

k. In computing depreciation expense for 2010, use straight-line depreciation and assume a 30-year useful life with no residual value. Gross PP&E acquired during the year is depreciated for only half the year. In other words, depreciation expense for 2010 is the sum of two parts: (1) a full year of depreciation on the beginning balance in PP&E, assuming a 30-year life and no residual value and (2) a half-year of depreciation on any new PP&E acquired during the year, based on the change in the gross PP&E balance.

l. Assume an interest rate on short-term loans payable of 6.0% and on long-term debt of 8.0%. Only a half-year’s interest is charged on loans taken out during the year.

For example, if short-term loans payable at the end of 2010 are $15 and given that short-term loans payable at the end of 2009 were $10, total short-term interest expense for 2010 would be $0.75 [($10  0.06) + ($5  0.06  1⁄2)].
Note: These statements were constructed as part of the spreadsheet assignment in Chapter 10; you can use that spreadsheet as a starting point if you have completed that assignment.
For this exercise, add the following additional assumptions:
• In addition to preparing forecasted financial statements for 2010, Handyman also wishes to prepare forecasted financial statements for 2011. All assumptions applicable to 2010 are also assumed to be applicable to 2011. Sales in 2011 are expected to be 40% higher than sales in 2010.
Clearly state any additional assumptions that you make.
2. For each forecasted year, 2010 and 2011, state whether Handyman is expected to issue new shares of stock or to repurchase shares of stock.
3. Repeat (2), with the following changes in assumptions:

a. The debt ratio in 2010 and 2011 is exactly equal to 0.70.

b. The debt ratio in 2010 and 2011 is exactly equal to 0.95.
4. Comment on how it is possible for a company to have negative paid-in capital.