Forecasting Income and Cash. Newton Company recently (late December 1997) negotiated a ($ 100,000) bank loan from

Question:

Forecasting Income and Cash. Newton Company recently (late December 1997) negotiated a $\$ 100,000$ bank loan from the 3rd National Bank of Cincinnati. As part of the loan agreement, the bank requires a cash-flow forecast for the current year to help determine whether Newton can repay the loan. The following December 31, 1997, data are available:

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Other data relating to 1998 include:

(a) Sales are expected to be $\$ 1,000,000$. Accounts receivable at yearend is expected to be $\$ 140,000$.

(b) Cost of goods sold is expected to be $\$ 400,000$, and yearend inventory is expected to be $\$ 150,000$.

(c) Accounts payable is expected to increase by $\$ 15,000$.

(d) Wages payable is expected to be $\$ 22,000$ at yearend, and the wages expense is expected to be $\$ 230,000$.

(e) Depreciation expense will be $\$ 50,000$.

(f) Other expenses, all paid in cash, are expected to be $\$ 95,000$, including interest on the loan.
(g) Cash expenditures for plant and equipment are expected to be $\$ 160,000$.
(h) Newton expects to pay a dividend of $\$ 40,000$.
\section*{Required:}
1. Calculate the forecast net income for 1998.
2. What is the anticipated cash provided by operations in 1998? Is this cash flow adequate to meet the bank's expectation of loan repayment? Comment.