2 View as TextDownload PRO-FORMA FINANCIAL STATEMENTS Case Study Due Feb 28/23 An entrepreneur, Susan, is investigating the possibility of going into business, and you are assigned to help her prepare pro-forma financial statements. She is going into a small business selling two products, i.e. high, quality sneakers and socks. They plan to distribute their products using two channels to retailers and direct to consumers through their e-commerce site. The anticipated total sales for the launch in 2024 and the percentage sales increases for the following months are given below: Jan 0 Feb. - Sneakers 200 units (150 units wholesale, 50 units e-commerce) - Socks 500 units (400 units wholesale, 100 units e-commerce) Mar. +40% Apr. +15% May. +5% June +5% July - onwards +3% each month The percentage increases shown for March onwards apply to both product lines and wholesale and e-commerce sales. The increases represent the increase over the previous months sales, NOT the increase from the February sales. It is projected that sales will be made at the following average selling prices: - Sneakers $140.00 each wholesale, $175 each e-commerce site - Socks $13.50 each wholesale, $25 each e-commerce It is anticipated that the average cost of sales per unit will be - Sneakers $100 each - Socks $10 each The wholesale sales have a 30-day collection period. The e-commerce sales are collected immediately. The owners investment and the amount borrowed from a relative through a note payable are as follows, arranged in December of the prior year. INVESTMENT NOTE PAYABLE $50,000 $40,000 The note payable is interest only, paid monthly at an annual rate of 5%. Susan decided to keep a minimum of $2,000 cash at all times starting in January in case of emergencies. The business will have to pay prepaid rent equal to their first and last months rent. The term of her lease is five years. The rent is $2,000 per month. 1 The shop is 500 square ft, and they will need to hire a contractor and spend $20,000 in January to fix it. The contractor will accept 50% of the payment in January, with the balance due in February. Depreciation must be calculated. i.e. Leasehold Improvements should be written off over the life of the lease. Susan must purchase furniture and fixtures for her renal unit for $5,000. The furniture and fixtures depreciate at a diminishing balance rate of 20% per year, with the first year being half the normal rate. Susan now has to look at inventory purchases. Their inventory stocking policy and the payment terms she has been able to negotiate with her suppliers are as follows: - purchase inventory one month prior to sale. Both their sneaker and belt suppliers will only agree to 100% C.O.D. In January, they will purchase and pay for units she intends to sell in February. The owner has come up with the following information regarding monthly expenses: Salaries/mo. 3000 Insurance/mo. 150 Advertising/mo. 100 Municipal Taxes/mo. 85 Travel Expenses/mo. 60 Heat Light & Water/mo. 125 Accounting/mo. 115 The accounts illustrated in the Cash Flow Projection & Income Statement may have to be modified. i.e. other accounts may have to be added, or some accounts may not be needed REQUIRED: 1. Complete the Sales & Cost of Sales by Product for the company. 2. Complete the Cash Flow Projection, Income Statement & Balance Sheet. 3. What line of credit will have to be negotiated, so their cash balance during the first six months does not fall below $2,000? (from Cash Flow Projection) 4. Calculate the following Financial Ratios: a. Gross Margin Ratio = Gross Profit/Sales b. Current ratio = Current assets/current liabilities c. Debt to equity ratio = total debt (total liabilities)/equity (net worth) d. Return On Investment = Income (before taxes but after interest)/net worth e. Inventory turnover ratio = Cost of goods sold/average inventory (average inventory is beginning inventory + ending inventory divided by 2) Compare your calculations with the Industry Average. The government website only publishes the Gross Margin Ratio. Can you make any comments on the other ratios? Is there any action that Susan needs to take? 2 Grading Rubric /100 Marks Sales Forecast 10 Cash flow 25 Income Statement 25 Balance Sheet 25 Ratios 15 100 0 3 can you please answer question 3. 3. What line of credit will have to be negotiated, so their cash balance during the first six months does not fall below $2,000? (from Cash Flow Projection