Calculating LIFO, FIFO, Income and Cash Flows

An acquaintance has proposed the following business plan to you. A local company requires a consistent quantity of a commodity and is looking for a reliable supplier. You could become that reliable supplier.

The cost of the commodity is expected to rise steadily over the foreseeable future, but the company is willing to pay more than the price that is current at the time. All you would need to do is make an investment, purchase the inventory and then deliver inventory to the company over the following year. One complication is that the commodity is available for purchase only seasonally, so at the end of every year you would need to purchase the supply for the following year. The customer pays promptly on delivery.

An initial cash investment of $$31,000$ would be used to purchase $$25,000$ of inventory in December $2016.$ The remaining cash would be held for liquidity needs. In the following year, you would deliver this inventory to the customer. Inventory costs are expected to increase by $$5,000$ per year, and the customer agrees to pay $$7,500$ more than the current cost of inventory. So$,$ during $2017,$ you would deliver inventory that originally cost $$25,000,$ receive payment of $$37,500$ and pay $$30,000$ to purchase inventory for the current year. This pattern would continue in future years, but with annually increasing costs of inventory and corresponding increases in the price charged the customer.

If you accept this proposal, your objective would be to receive $$4,500$ in dividends $($about a $15\%$ return on the $$31,000$ investment$)$ at the end of each year. Assume your business would have an income tax rate of $40\%.$

a$.$ Construct a projected balance sheet as of the end of December $2016.$

b$.$ Construct financial forecasts of income statements, cash flows $($direct method$)$ and balance sheets for the next three years $($through $2019).$ Assume that your business would operate in a tax jurisdiction that requires the use of FIFO for inventory.

c$.$ Construct financial forecasts of income statements, cash flows $($direct method$)$ and balance sheets for the next three years $($through $2019).$ Assume that your business would operate in a tax jurisdiction that requires the use of LIFO for inventory.

Projected Balance Sheet

Financial Statement Forecasts $-$ FIFO

Financial statement Forecasts $-$ LIFO

Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers.

Year $201720182019$

Income statement:

Revenue Answer

$0$

Answer

$0$

Answer

$0$

COGS$-$LIFO Answer

$0$

Answer

$0$

Answer

$0$

Earnings before tax Answer

$0$

Answer

$0$

Answer

$0$

Tax expense Answer

$0$

Answer

$0$

Answer

$0$

Net income Answer

$0$

Answer

$0$

Answer

$0$

Cash flows:

Receipts Answer

$0$

Answer

$0$

Answer

$0$

Inventory purchases Answer

$0$

Answer

$0$

Answer

$0$

Tax payments Answer

$0$

Answer

$0$

Answer

$0$

Cash from operations Answer

$0$

Answer

$0$

Answer

$0$

Dividends Answer

$0$

Answer

$0$

Answer

$0$

Cash from financing Answer

$0$

Answer

$0$

Answer

$0$

Net change in cash Answer

$0$

Answer

$0$

Answer

$0$

Balance sheet:

Assets

Cash Answer

$0$

Answer

$0$

Answer

$0$

Inventory Answer

$0$

Answer

$0$

Answer

$0$

Total Answer

$0$

Answer

$0$

Answer

$0$

Shareholders' equity

Contributed capital Answer

$0$

Answer

$0$

Answer

$0$

Retained earnings Answer

$0$

Answer

$0$

Answer

$0$

Total Answer

$0$

Answer

$0$

Answer

$0$