It is April 1, 2020. Two Season Sports is a specialty backcountry skiing and mountaineering store in southwestern Colorado. The shop ended 2019 in good shape, but the 2020 winter season was slow to take off because of a persistent La Nina weather pattern. No snow, no sales. By the end of March ski sales were 20% below expectations. The summer season still looked promising, and with aggressive sales events, the owners thought that total sales for the year would be down just 10% from last year. However, because of discounting the ski inventory the cost of goods sold as a percent of sales would increase from its historic 64% to 68%. GA&S expense would increase to $150,000 for 2020 with some additional marketing costs and higher health insurance premiums for employees. Depreciation Expense in 2020 will be $30,000. A new ski base prep machine is the only new fixed asset purchased during 2020. It costs $18,000. No assets will be sold. The owners plan to reduce Inventory to $450,000 by the end of 2020. This reduction in inventory will require deep discounts on some items. These discounts are included in the estimate of Sales and COGS. Other accounts (Cash, A/R and A/P) will be the same percent of sales in 2020 as in 2019. Develop pro forma financial statements for 2020 on the form provided. Compute interest as if the Bank Loan and the LT Debt were reduced on January 1, 2020, so interest is based on your new year-end loan amounts for the entire year. Will the Bank Loan increase or decrease by the end of 2020? What changes contribute to the change in the bank loan; that is, what were the primary uses and sources of cash that caused the bank loan to change? Assumptions (all numbers in thousands) Sales will decrease 10% in 2020 COGS will increase to 68% of Sales in 2020. GA&S will increase to $150,000 in 2020. In 2020, depreciation expense will be $30,000, no assets will be sold and $18,000 of new assets will be purchased. The bank loan has an interest rate of 5.6% and the Long-term Debt (LTD) has an interest rate of 7.2%. LTD will be reduced by $90,000 during 2020. Another $90,000 payment will be due in 2021. The tax rate is 30%. Inventory will be reduced to $450,000 during 2020. Cash, A/Receivable and A/Payable will be the same % of sales in 2020 as they were in 2019. The minimum cash balance is 2% of Sales. All earnings are retained to finance growth (No dividends are paid). Assume Cash is kept at its minimum level as long as there is a loan outstanding. This is all the data given.

2019 Actual and 2020 Pro Forma A. Income Statement Sales COGS Gross Margin GA&S Expense Interest Expense Depreciation Expense Taxable Income Taxes Net Income 2019 820,000.00 524,800.00 295,200.00 145,000.00 30,000.00 35,000.00 85,200.00 25,560.00 59,640.00 2020 Pro Forma 738,000 501,840 236,160 150,000 Bank loan*.056 30.000 Balance Sheet Assets Cash A/Receivables Inventory Total Current Assets Net Fixed Assets Total Assets 2019 16,400.00 24,600.00 574,000.00 615,000.00 120,000.00 735,000.00 2020 Pro Forma 14,760 22,140 450,000 486,900 108,000 594,000 2020 Pro Forma 47,232 90,000 Liabilities & Equity A/Payable Bank Loan (5.6%) Current Portion LT Debt Total Current Liabilities Long-term Debt (7.2%) Common Stock Retained Earnings Total Liabilities & Equity 2019 52,480.00 73,120.00 90,000.00 215,600.00 270,000.00 24,000.00 225,400.00 735,000.00 180,000 24,000 594,000 2019 Actual and 2020 Pro Forma A. Income Statement Sales COGS Gross Margin GA&S Expense Interest Expense Depreciation Expense Taxable Income Taxes Net Income 2019 820,000.00 524,800.00 295,200.00 145,000.00 30,000.00 35,000.00 85,200.00 25,560.00 59,640.00 2020 Pro Forma 738,000 501,840 236,160 150,000 Bank loan*.056 30.000 Balance Sheet Assets Cash A/Receivables Inventory Total Current Assets Net Fixed Assets Total Assets 2019 16,400.00 24,600.00 574,000.00 615,000.00 120,000.00 735,000.00 2020 Pro Forma 14,760 22,140 450,000 486,900 108,000 594,000 2020 Pro Forma 47,232 90,000 Liabilities & Equity A/Payable Bank Loan (5.6%) Current Portion LT Debt Total Current Liabilities Long-term Debt (7.2%) Common Stock Retained Earnings Total Liabilities & Equity 2019 52,480.00 73,120.00 90,000.00 215,600.00 270,000.00 24,000.00 225,400.00 735,000.00 180,000 24,000 594,000