D&R Products, Inc., used as an example in this chapter, is an actual firm (although some of the facts were changed to maintain confidentiality). David Allen bought the firm from its founding owners and moved its operations to his hometown. Although he has estimated the firm’s asset needs and financing requirements, he cannot be certain that these projections will be realized. The figures merely represent the most-likely case. Allen also made some projections that he considers to be the worst-case and best-case sales and profit figures. If things do not go well, the firm might have sales of only $200,000 in its first year. However, if the potential of the business is realized, Allen believes that sales could be as high as $325,000. If he needs any additional financing beyond the existing line of credit, he could conceivably borrow another $5,000 in short-term debt from the bank by pledging some personal investments. Any additional financing would need to come from Allen himself, thereby increasing his equity stake in the business.

  

Question If all of D&R Products’ other relationships hold, how will Allen’s worst-case and best-case projections affect the income statement and balance sheet in the first year? [(To help you in your analysis, D&R Product’s pro forma statements as presented in Exhibits 11.1, 11.3, and 11.4 are available at www.cengagebrain.com (select the Longenecker text)].