ATC 14-1

Business Applications Case Preparing and using pro forma statements

Mary Helu and Randy Adams recently graduated from the same university. After graduation they decided not to seek jobs at established organizations but, rather, to start their own small business hoping they could have more flexibility in their personal lives for a few years. Mary's family has operated Mexican restaurants and taco-trucks for the past two generations, and Mary noticed there were no taco-truck services in the town where their university was located. To reduce the amount they would need for an initial investment, they decided to start a business operating a taco-cart rather than a taco-truck, from which they would cook and serve traditional Mexican-styled street food.

They bought a used taco-cart for $18,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $22,000. Five-thousand dollars came from personal savings they had accumulated by working part time during college, and they borrowed $17,000 from Mary's parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 5 percent. They will repay the principal over the next few years as cash becomes available. They were able to rent space in a parking lot near the campus they had attended, believing that the students would welcome their food as an alternative to the typical fast food that was currently available.

After two months in business, September and October, they had average monthly revenues of $25,000 and out-of-pocket costs of $22,000 for rent, ingredients, paper supplies, and so on, but not interest. Randy thinks they should repay some of the money they borrowed, but Mary thinks they should prepare a set of forecasted financial statements for their first year in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results from their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the cart will last at least four years, after which they expect to sell it for $6,000 and move on to something else in their lives. Mary agrees to prepare a forecasted (pro forma) income statement, balance sheet, and statement of cash flows for their first year in business, which includes the two months already passed.

Required:

1. Prepare the annual pro forma financial statements that you would expect Mary to prepare based on her comments about her expectations for the business. Assume no principal will be repaid on the loan.

2. Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Randy and Mary's business probably will not match their budgeted statements.

Application Case 14-1 Worksheet
Budgeted
Financial Statements
Income Statement	Amounts	Computations
Sales Revenue
Cost of Goods Sold
Depreciation Expense
Other Expense
Operating Income
Interest Expense
Net Income
Statement of Cash Flows
Operating Activities:
Inflows from sales
Outflows for:
Purchase of food, etc.
Other initial expenses
Interest Expense
NCF Operating Activities
Investing Activities:
Outflow for purchase of
cart
Financing Activities
Inflows from:
Contribution by owners
Loan from parents
Financing Act.
Net Change in Cash
Plus beginning cash
Ending cash balance
Balance Sheet
Cash
Food cart
Acc. Depreciation
Total Assets
Note Payable
Contributed Capital
Retained Earn.
Total Liab. & Equity