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A-3.3 Goya Direct Music Limited operates a mail order business offering classical music CDs to the general public. The balance sheet is as follows: 27 107 80 214 Goya Direct Music Limited Balance Sheet As at May 31, 2010 (in $ thousands) Current assets Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Furniture and fixtures 72 Less: Accumulated depreciation (24) Motor vehicles 46 Less: Accumulated depreciation (28) Total property, plant, and equipment Total assets Current liabilities Accounts payable Accrued overhead Long-term liabilities Debentures (10%, 2015) Total liabilities 48 18 66 280 93 17 110 60 170 Shareholders' equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 10 100 110 280 The following forecast information for the six months ended November 30, 2010, is available: 1. Sales and purchases for the six months ended November 30, 2010, are estimated as follows: Sales ($) Purchases ($) June July August September October November 130,000 140,000 150,000 110,000 90,000 105,000 102,000 118,000 115,000 88,000 67,000 110,000 Copyright 2012 Pearson Canada Inc. 35 2. The gross profit margin on goods sold is 40%. 3. Customers are allowed one month's credit. Suppliers are paid one month after the month of purchase. 4. Salaries and wages are expected to be $30,000 each month. In addition, an annual staff bonus of $12,000 is due for payment in October 2010. All salaries and wages are paid in the month incurred. 5. Selling and administration expenses are expected to be $20,000 per month, and are payable one month after incurred. This figure includes a charge of $3,000 per month of depreciation of property, plant, and equipment. In addition to these expenses, the business is committed to a large advertising campaign. This is not due to commence until December 2010, although advance pay- ments of $60,000 must be made to newspapers and magazines in November 2010. 6. The only financing expense incurred by the business is debenture interest that is not payable until the year end. 7 $10,000 of the debenture loan will be repaid in August 2010. The business has arranged with the bank an overdraft limit of $100.000 to cover the next 12 months, which both parties agreed should not be exceeded. Ignore taxation. Required: (a) Prepare a cash budget for each of the six months to November 30, 2010. (b) Prepare a pro forma income statement for the six months ended November 30, 2010. (A monthly breakdown is not required.) (c) Discuss the problems, if any, the business is likely to face in the next six months and how these might be resolved