CASE 10-1 Preparing and Interpreting Cash Flow Forecasts Fax Corporation's income statement and balance sheet for the year ended December 31, Year 1, are reproduced below FAX CORPORATION Income Statement For Year Ended December 31, Year 1 Net sales. Cost of goods sold (excluding depreciation) $960,000 (550,000) Gross profit Depreciation expense . .. ... 410,000 $ 30,000 Selling and administrative expenses (190,000) 160,000 Income before taxes . 220,000 Income taxes (state and federal) (105,600) $ 114,400 Net income FAX CORPORATION Balance Sheet December 31, Year 1 Assets Current assets $ 30,000 5,500 Cash.... Marketable securities Accounts receivable. .. 52,000 Inventory.. 112,500 $200,000 Total current assets... Plant and equipment ... Less: Accumulated depreciation 630,000 (130,000) 500,000 $700,000 Total assets Liabilities and Equity Current liabilities $ 60,000 50,000 Accounts payable . Notes payable... $110,000 Total current liabilities Long-term debt 150,000 Equity Capital stock... Retained earnings Total liabilities and equity .. 250,000 190,000 440,000 $700,000 Additional Information: 1. Purchases in Year 1 are $480,000. 2. In Year 2, management expects 15% sales growth and a 10% increase in all expenses except for depreciation, which increases by 5% 3. Management expects an inventory turnover ratio of 5.5 for Year 2 4. A receivable collection period of 90 days, based on year-end accounts receivable, is planned for Year 2 5. Year 2 income taxes, at the same rate of pretax income for Year 1, will be paid in cash. 6. Notes payable at the end of Year 2 will be $30,000. 7. Long-term debt of $25,000 will be paid in Year 2 8. FAX desires a minimum cash balance of $20,000 in Year 2 9. The ratio of accounts payable to purchases for Year 2 is the same as in Year 1 10. All selling and administrative expenses will be paid in cash in Year 2 11. Marketable securities and equity accounts at the end of Year 2 are the same as in Year 1 Required: a. Prepare a statement of forecasted cash inflows and outflows (what-if analysis) for the year ended December 31, Year 2 b. Will FAX Corporation have to borrow money in Year 2? CCK Forecast cash needed. $55.920