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Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In

Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows:

End of the year information:

Account

12/31/17

Ending Balance

Cash

50,000

Accounts Receivable

175,000

Inventory

126,000

Equipment

480,000

Accumulated Depreciation

90,000

Accounts Payable

156,000

Short-term Notes Payable

12,000

Long-term Notes Payable

200,000

Common Stock

235,000

Retained Earnings

solve

Additional Information:

  • Sales for December total 10,000 units. Each months sales are expected to exceed the prior months results by 5%. The products selling price is $25 per unit.
  • Company policy calls for a given months ending inventory to equal 80% of the next months expected unit sales. The December 31 2017 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit.
  • Sales representatives commissions are 12.5% of sales and are paid in the month of the sales. The sales managers monthly salary will be $3,500 in January and $4,000 per month thereafter.
  • Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable.
  • The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of sale).
  • All merchandise purchases are on credit, and no payables arise from any other transactions. One months purchases are fully paid in the next month.
  • The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
  • Dividends of $100,000 are to be declared and paid in February.
  • No cash payments for income taxes are to be made during the first calendar quarter. Income taxes will be assessed at 35% in the quarter.
  • Equipment purchases of $55,000 are scheduled for March.

Part A:

  • Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 may be prepared.
  • Expected cash receipts from customers and the expected March 31 balance of accounts receivable.
  • Expected cash payments for purchases and the expected March 31 balance of accounts payable.
  • Cash buget
  • Budgeted income statement.
  • Budgeted statement of retained earnings.
  • Budgeted balance sheet.

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