Question: Assuming the company does NOT invest in the new product line, prepare forecasted income statements and balance sheets at year$-$end $2010,2011,$ and $2012.$ Based on these forecasts, estimate Flash$$s required external financing: in this case all required

external financing takes the form of additional notes payable from its commercial bank,

for the same period. In other words, the $$plug account$$ is Notes Payable. $($Hint:

Remember to explicitly note your assumptions, and do not include anything but

formulas in your actual forecast. Based on the overall economic recovery and recent reports of robust sales of smart phones and net books, in early May the company was forecasting full$-$year $2010$ sales of $$120$ million, with a corresponding cost of goods sold number of $$9732$ million. Flash's projected year$-$end $2010$ current asset investment necessary to support this level of sales and cost of goods sold was also prepared to

assess the company's immediate financing needs.

Cash $ $3\mathrm{.}960,000$

Accounts receivable $19\mathrm{.}726\mathrm{.}000$

Inventory $13,865,000$

Prepaid expenses $480\mathrm{.}000$

Total current assets $$38,031,000$

These forecasts of working capital requirements were based on sales in recent months, projected demand from OEMs, distributors, and retailers during the remainder of the year, and expected relationships between the income statement and these working capital accounts. Cash had been estimated at $3\mathrm{.}3\%$ of sales, accounts receivable were calculated based on an estimated $60$ days sales outstanding, and the inventory forecast assumed the company would improve its inventory

turnover, holding only $52$ days of cost of goods sold in inventory. Beyond $2010,$ the marketing manager had estimated that sales of the company's existing products would reach $$144$ million in $2011.$ It was expected that sales would be maintained at that level in $2012,$ but after that sales would decline to $$128$ million in $2013$ and $$105$ million in $2014.$ In spite of the expected growth in the overall industry, Flash's product line would be less competitive absent new products which were significant improvements over previous offerings. In addition to these income statement and working capital forecasts, there were other important items which would impact the company's forecasts and financing requirements. Purchases typically made up $60\%$ of cost of goods sold, and the year$-$end $2009$ accounts payable balance represented $33$ days of purchases. This wasn't much greater than the $30-$day payment period that Flash tried to

maintain, but in $2010$ and beyond the company was committed to achieve and maintain this number. The second of these items was research and development, which was planned to increase in $2010$ to drive new product innovation. Research and development expenditures had been approximately $5\%$ of sales in recent years, and in $2010$ and beyond management was committed to maintaining expenditures at this percent of sales. Selling, general and administrative expenses were driven by sales volume and were expected to maintain their $2009$ relationship with sales. Capital expenditures necessary to support existing product lines and sales growth were projected at $$900,000$ per year in $2010$ through $2012.$ The final item was yearly depreciation expense, which was calculated as $7\mathrm{.}5\%$ of the beginning of year balance of property, plant & equipment at cost$.$ A summary of these important

forecast assumptions is included. Make me a $,$ prepare forecastedincome statements and balance sheets at year$-$end $2010,2011,$ and $2012$Key Forecasting Assumptions and Relationships for $2010$ Through $2012$:

Line Item

Cost of goods sold $81\mathrm{.}10\%$ of sales

Research and development $5\mathrm{.}0\%$ of sales

Selling, general and administrative $8\mathrm{.}36\%$ of sales

Interest expense ; beginning of year debt balance x interest rate

Other income $($expenses$)50,000$$ of expense each year

Cash $3\mathrm{.}3\%$ of each sale

Accounts receivable $60$ days of sale outstanding

Inventories $52$ days of costs of goods sold

Prepaid expenses $0\mathrm{.}4\%$ of sales

Property, plant & equipment at cost beginning PP and E at cost $+$ capital expenditures

Accumulated depreciation beginning A$/$D $+7\mathrm{.}5\%$ of beginning PP and E at cost

Accounts payable $30$ days of payable

Purchases $60\%$ of cost of goods sold

Accrued expenses $0\mathrm{.}73\%$ of sales

Income taxes payable $10\%$ of income tax expense

Other current liabilities $0\mathrm{.}62\%$ of sales

Assumption or Ratio