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THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Narcolarm, Inc. (C) Mary Lou Black, M.D., president of Narcolarm, Inc., was in the process of preparing a business plan, including some pro forma (i e projected) financial statements, for her new venture (see Narco- larm, Inc. (A) and Narcolarm, Inc. (B)). Enlisting the help of a niece who had recently completed a course in accounting, Dr. Black first prepared a list of requirements and activities necessary to launch the new enterprise, which she called "Narcolarm, Inc." These requirements and activities led to the development of an initial bal- ance sheet, shown in Exhibit I. Next, again with the help of her niece, Dr. Black projected the activities that would take place during the first year of operations. These are shown in Exhibit 2. She realized that these were over- all estimates, and that they would not necessarily occur in the sequence shown, but she felt they were sufficient to allow her to prepare a set of pro forma financial statements for the first year of operations. Unlike her previous plan, she now planned to store completed Narcolarms in inventory, so that she would always have sufficient devices on hand to meet demand. As a result, she would need to have three inventories: raw-materials, work-in-process, and finished-goods. NARCOLARM, INC. (C) Exhibit 1. Initial Balance Sheet Assets Cash Raw material inventory Total current assets S 15.000 15.000 $ 30.000 Liabilities and Owners' Equity Loan payable $ 20,000 Total liabilities $ 20,000 Manufacturing machinery Patent 40.000 25,000 Contributed capital 75.000 Total assets $95.000 Total liabilities and owners' equity $95.000 Exhibit 2. Expected First Year Activities Item Description Amount $200,000 5,000 100.000 45.000 Sales (all received in cash by end of year) Additional manufacturing equipment purchases (5 year life, $1,000 estimated salvage value) Purchases of raw materials (all paid in cash) Ending balance, raw materials inventory Payroll expenses for manufacturing personnel (all paid in cash) Payroll expenses for selling and administrative personnel (all paid in cash) Other selling and administrative expenses (e.g. advertising) (all paid in cash) 40.000 25.000 10,000 2.000 4.000 4,800 Interest on bank loan (paid in cash) Principal payment on bank loan Depreciation on manufacturing machines (4.000 + 800) Amortization of patent (17 years) Ending balance, work-in-process inventory Ending balance, finished goods inventory 1,471 34,800 20,000 8,000 Payment of dividends in cash