ATC 7-1 (Algo) Business Applications Case: Preparing and using pro forma statements

Mary Helu and Jason Haynes 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-style street food.

They bought a used taco cart for $14,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $19,000. They took $3,000 from personal savings they had accumulated by working part time during college, and they borrowed $14,000 from Mary's parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 4 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 $23,000 and out-of-pocket costs of $18,000 for rent, ingredients, paper supplies, and so on, but not interest. Jason 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 $3,000 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.

Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Income Statement Cash Flows Balance Sheet Prepare the budgeted income statement. Budgeted Income Statement Sales revenue $ 276,000 Cost of goods sold 228,000 X Depreciation expense (2.750) Other expense Operating income 45,250 X Interest expense (560) 0 Net income $ 44.690 income Statement Cash Flows > Income Statement Cash Flows Balance Sheet Prepare the budgeted statement of cash flows. (Cash outflows should be indicated by a minus sign.) $ 276,000 Budgeted Statement of Cash Flows Cash flows from operating activities Inflows from sales Outflows for: Purchase of food, etc. Interest expense Other initial expenses (228,000) (560) 0 0 47.440 (14,000) Net cash flows from operating activities Cash flows from investing activities Outflow for purchase of cart Cash flow from financing activities Inflows from: Contribution by owners Loan from parents 0 3,000 14,000 17,000 50,440 Net cash flows from financing activities Net Change in Cash Plus: Beginning cash balance Ending cash balance 0 50,440 Complete this question by entering your answers in the tabs below. Income Statement Cash Flows Balance Sheet Prepare the budgeted balance sheet. (Amounts to be deducted should be indicated by a minus sign.) Budgeted Balance Sheet Assets Cash Food cart Accumulated depreciation 50,440 14,000 (2,750) 61.690 Total assets Liabilities Note payable $ 14,000 0 Equity Contributed capital Retained earning 3,000 47,690 Total liabilities and equity 64,690