FORECASTING ASSIGNMENT- Peel Inc.

Assume you are the Financial Analyst for Peel Inc., and it is the end of December 2019.

Peel Inc., 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, Peel Inc. is forecasting level production and the impact of plans by the credit department to bring the average collection period down to 35 days.

Forecasted sales for the upcoming months are as follows:

January	$2,174,978
February	2,299,977
March	2,449,976
April	2,624,974
May	2,749,973
June	2,849,972

Sales for November were $1,924,981 and will be approximately $2,049,980 for the current 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 $590,000 a month beginning in January. In November they were $670,000, and in December they are expected to be $610,000. The purchases are paid in 40 days. Labour expense will be paid as incurred and will be $198,000 a month. Other expenses of manufacturing will also be paid as incurred and are expected to be $360,000 a month. Cost of goods sold has regularly been 70% of sales.

Amortization is $39,000 per month. Selling and administrative expenses are expected to be 13 percent of sales. The tax rate is 42 percent.

There will be payments on Notes Payable of $680,000 in each of February and May. Income taxes of $340,000 are due and paid in April. Dividends of $24,000 and interest of $270,000 (3 months of interest) are paid in January and April.

PEEL INC.

Balance Sheet (Estimated)

December 31, 2019

($ thousands)

ASSETS
Current Assets:
	Cash				$666
	Accounts Receivable				3,578
	Inventory				8,231
			Total Current Assets		$12,475
Capital Assets:
	Plant and Equipment			$11,273
	Less: Accumulated Amortization			4,784	6,489
Total Assets					$18,964
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
	Accounts Payable				$945
	Notes Payable				3,700
	Accrued Liabilities				2,596
		Total Current Liabilities			$7,241
	Long-term Debt				4,725
	Common Stock				4,500
	Retained Earnings				2,498
Total Liabilities and Shareholders Equity					$56,892

Required:

Using the information above, prepare pro forma statements for Peel Inc. for the six months ending January to June 2020. Also construct a cash budget for the six-month period and identify any need for short-term financing. There are no changes in accounts not mentioned above. Comment on the policy changes and examine the consequences if the collection period remains at 60 days. Assume capital assets are sufficient for increased sales.

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Actual Expected Forecasted Nov Dec $1,924,981 $2,049,980 Jan Feb Mar Apr May Jun $2,174,978 $2,299,977 $2,449,976 $2,624,974 $2,749,973 $2,849,972 Income Statement - Jan. to Jun. $8,224,919 Sales COGS (70%) $1,347,487 $1,434,986 $1,522,485 $1,609,984 $1,714,983 $1,837,482 $1,924,981 $1,994,980 Gross Profit $577,494 $614,994 $652,493 $689,993 $734,993 $787,492 $824,992 $854,992 $39,000 $250,248 $288,247 $39,000 $266,497 $309,497 $39,000 $298,997 $351,996 $39,000 $318,497 $377,496 $39,000 $357,496 $428,495 $39,000 $370,496 $445,495 Amortization Selling and Admin (13%) Operating Profit Interest ($) Profit Before Taxes Tax (42%) Net Income Dividends To Retained Earnings $288,247 $121,064 $167,183 $309,497 $129,989 $179,508 $39,000 $282,747 $330,746 $270,000 $60,746 $25,513 $35,233 $24,000 $11,233 $351,996 $147,838 $204,158 $377,496 $158,548 $218,948 $39,000 $341,247 $407,246 $270,000 $137,246 $57,643 $79,602 $24,000 $55,602 $428,495 $179,968 $248,527 $445,495 $187,108 $258,387 $167,183 $179,508 $204,158 $218,948 $248,527 $258,387 $590,000 $198,000 Purchases $670,000 Labour (paid as incurred) $198,000 Other Manufacturing $360,000 Cost of Goods Producer $112,000 $610,000 $198,000 $360,000 $52,000 $590,000 $198,000 $360,000 $32,000 $590,000 $198,000 $360,000 $32,000 $590,000 $198,000 $360,000 $32,000 $590,000 $198,000 $360,000 $32,000 $590,000 $198,000 $360,000 $32,000 $32,000 $680,000 $680,000 $270,000 Principal Payment - Notes Interest Payments Income Tax Payments Dividend Payments $270,000 $340,000 $24,000 $24,000 Purchases From Nov Purchases From Dec Purchases From Jan Purchases From Mar Purchases From Apr Purchases From May Purchases Total Cash Payments Labour (Cash) Selling & Admin (Cash) Other Manufacturing (Cash) Principle Payments (Cash) Interest (Cash) Taxes (Cash) Dividends (Cash) Total Cash Payments Sales Cash Receipts Nov Cash Receipts Dec Cash Receipts Jan Cash Receipts Feb Cash Receipts Mar Cash Receipts Apr Cash Receipts May Cash Receipts Jun Total Cash Receipts Cash Budget Cash Payments Cash Receipts Net Incrl(Decr) Cash 1----- Balance Sheet Current Assets: Cash Accounts Receivable Inventory Total Current Assets Capital Assets: Plant and Equipment Less: Accum Ammort Total Assets $680,000 $680,000 Current Liabilities: Accounts Payable Notes Payable Accrued Liabilities Accrued Taxes Total Current Liabilities Long-term Debt Common Stock Retained Earnings Total Liabilities and SHE