Toys for You, a manufacturing company, has been growing quickly but has found that its financial situation is continually under pressure. Production has fluctuated to meet demand in an attempt to provide firstclass service, resulting in larger inventory positions. Also, the collection of accounts has worsened to approximately 60 days, which is well above the terms of 30 days. To address the financial concerns, Toys for You has proposed level production and an effort by the credit department to bring the average collection period down to 35 days. Estimated sales for the upcoming months are:

July $1,957,500 October 2,362,500 August 2,070,000 November 2,475,000 September 2,205,000 December 2,565,000. Sales for May were $1,732,500 and will be approximately $1,845,000 for the current month of June. It is projected that the current collection period of 60 days will be reduced to 50 days for July and August, 42 days for September and October, and will meet the target of 35 days in November and December. Purchases are forecast to be $585,000 a month beginning in July, until December. In May they were $675,000, and in June they are expected to be $607,500. The purchases are paid in 40 days. Labour expense will be paid as incurred and will be $195,000 a month. Other expenses of manufacturing will also be paid as incurred and are expected to be $375,000 a month. Cost of goods sold has regularly been 70 percent of sales. Amortization is $38,000 per month. Selling and administrative expenses are expected to be 13 percent of sales. The tax rate is 42 percent. There will be payments on notes of $675,000 in each of August and November. Interest of $270,000 and income taxes of $338,000 are both due in October. Dividends of $22,500 are payable in July and October.

TOYS FOR YOU Balance Sheet (estimated) June 30, 2016 ($ thousands)

Assets Current assets: Cash ..................................... $ 666 Accounts receivable........................ 3,578 Inventory.................................. 8,231 Total current assets ...................... 12,475 Capital assets: Plant and equipment ....................... 11,273 Less: Accumulated amortization.............. 4,784 6,489 Total assets.................................. $18,964 Liabilities and Shareholders' Equity Current liabilities Accounts payable.......................... $ 945 Notes payable............................. 3,700 Accrued liabilities .......................... 2,596 Total current liabilities .................... 7,241 Long-term debt ............................ 4,725 Common stock ............................ 4,500 Retained earnings.......................... 2,498 Total liabilities and shareholders' equity......... $18,964

Using the information above, prepare pro forma statements for Toys for You for the three months ending September and December 2016. Also construct a cash budget for the sixmonth period and identify any need for shortterm financing. There are no changes in accounts not mentioned above. Comment on the policy changes and examine the consequences if the collection period remains at 60 days. Assume capital assets are sufficient for increased sales.