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Assume you are the Financial Analyst for Greenlife Industries, and it is January 1, 2021. Greenlife Industries, a manufacturing company, has been growing quickly, but

Assume you are the Financial Analyst for Greenlife Industries, and it is January 1, 2021.

Greenlife Industries, a manufacturing company, has been growing quickly, but it has found that its financial situation is continually under pressure. Production has fluctuated to meet demand in an attempt to provide first-class service, resulting in larger inventory positions. Also, the collection of accounts has worsened to approximately 60 days, which is well above the terms of 30 days. To address the financial concerns, Greenlife Industries has proposed level production and an effort by the credit department to bring the average collection period down to 35 days.

Estimated sales for the upcoming months are as follows:

January

$3,915,000

February

4,140,000

March

4,410,000

April

4,725,000

May

4,950,000

June

5,130,000

Sales for November were $3,465,000 and will be approximately $3,690,000 for the just completed month of December. It is projected that the current collection period of 60 days will be reduced to 50 days for January and February and to 42 days for March and April, and will meet the target of 35 days in May and June.

Purchases are forecast to be $1,170,000 a month beginning in January. In November they were $1,350,000, and in December they were $1,215,000. The purchases are paid in 40 days. Labour expense will be paid as incurred and will be $390,000 a month. Other expenses of manufacturing will also be paid as incurred and are expected to be $750,000 a month. Cost of goods sold has regularly been 70% of sales.

Amortization is $76,000 per month. Selling and administrative expenses are expected to be 13 percent of sales (and paid as incurred). The tax rate is 42 percent.

There will be payments on Notes Payable of $1,350,000 in each of February and May. Income taxes of $676,000 are due in April. Dividends of $45,000 and interest of $540,000 (3 months of interest) are payable in January and April.

GREENLIFE INDUSTRIES

Balance Sheet (Estimated)

December 31, 2020

($ thousands)

ASSETS

Current Assets:

Cash

$1,332

Accounts Receivable

7,156

Inventory

16,462

Total Current Assets

$24,950

Capital Assets:

Plant and Equipment

$22,546

Less: Accumulated Amortization

9,568

12,978

Total Assets

$37,928

LIABILITIES AND SHAREHOLDERS EQUITY

Current Liabilities:

Accounts Payable

$1,890

Notes Payable

7,400

Accrued Liabilities

5,192

Total Current Liabilities

$14,482

Long-term Debt

9,450

Common Stock

9,000

Retained Earnings

4,996

Total Liabilities and Shareholders Equity

$37,928

Required:

Using the information above, construct an pro forma Income Statement and cash budget for the six-month period (January to June 2021). Identify if there will be any need for short-term financing. Also, comment on the policy changes and potential consequences if the collection period had remained at 60 days. Assume capital assets are sufficient for increased sales.

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