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 first-class 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 finanical 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 reduces 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. In May they were $675,000 and in June they are expected to be $607,500. The purchases are paid in 40 days. Materials used per month beginning in July will be $744,000. Labour expense will be paid when incurred and are expected to 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 $22,500 are payable in July and October. TOYS FOR YOU Balance Sheet (estimated) June 30, 2012 ($ 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 proforma statements for Toys for You for the three months ending September and December 2012. Also construct a cash budget for the six-month period and identify any need for short-term 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.

Solution
Problem 4-33 (LO 3, LO 4, LO 5, LO 6)
Instructions
Prepare cash payment, inventory and cash receipt information first. Then prepare the proforma income statement
and the proforma balance sheet.
			Toys for You
in thousands
	May	June	July	August	Sept.	October	Nov.	Dec.
Purchases	$675.0	$607.5	$585.0	$585.0	$585.0	$585.0	$585.0	$585.0
Payment		FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Accounts payable		945.0	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Labour			195.0	195.0	195.0	195.0	195.0	195.0
Selling & admin.			FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Other			375.0	375.0	375.0	375.0	375.0	375.0
Note payable				675.0			675.0
Interest						270.0
Taxes						338.0
Dividends			22.5			22.5
Total payments			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Cost of goods			FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
produced
Cost of goods sold					FORMULA			FORMULA
Inventory		8,231.0	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
	May	June	July	August	Sept.	October	Nov.	Dec.
Sales	1,732.5	1,845.0	1,957.5	2,070.0	2,205.0	2,362.5	2,475.0	2,565.0
Collections
60 days			CELL REF	CELL REF
50 days				FORMULA	FORMULA	FORMULA
42 days						FORMULA	FORMULA	FORMULA
35 days								FORMULA
Total collections			0.0	0.0	0.0	0.0	0.0	0.0
Accounts receivable		3,578.0	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Receipts			0.0	0.0	0.0	0.0	0.0	0.0
less payments			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Net receipts			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Accumulated cash		666.0	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
		Toys for You
		Proforma Income Statement
				September	December
Sales				FORMULA	FORMULA
Cost of goods sold				CELL REF	CELL REF
Gross profit				FORMULA	FORMULA
Selling & admin.				#VALUE!	#VALUE!
Amortization				114.0	114.0
Operating Profit				#VALUE!	#VALUE!
Interest				0.0	270.0
Profit before taxes				#VALUE!	#VALUE!
Taxes (42%)				FORMULA	FORMULA
Net income				#VALUE!	#VALUE!
Dividends				22.5	22.5
To retained earnings				#VALUE!	#VALUE!
		Toys for You
		Proforma Balance Sheet
		Assets
			June 30	Sept 30	Dec 31
Current assets
Cash			666.0	CELL REF	CELL REF
Accounts receivable			3,578.0	CELL REF	CELL REF
Inventory			8,231.0	CELL REF	CELL REF
Total current assets			12,475.0	0.0	0.0
Capital assets
Plant & equipment			11,273.0	11,273.0	11,273.0
Accum. Amort.			4,784.0	4,898.0	5,012.0
Net capital assets			6,489.0	6,375.0	6,261.0
Total assets			18,964.0	19,159.0	18,998.0
		Liabilities and Shareholders' Equity
Current liabilities
Accounts payable			945.0	CELL REF	CELL REF
Notes payable			3,700.0	3,025.0	2,350.0
Accrued liabilities			2,596.0	2,596.0	2,596.0
Accrued taxes			0.0	CELL REF	#VALUE!
Total current liabilities			7,241.0	FORMULA	#VALUE!
Long term debt			4,725.0	4,725.0	4,725.0
Common stock			4,500.0	4,500.0	4,500.0
Retained earnings			2,498.0	FORMULA	FORMULA
Total liabilities and			18,964.0	19,159.5	18,998.5
shareholders' equity
Now assume that the collection period remains at 60 days. Recalculate all of the above to examine the
consequences of this assumption.
			Toys For You
			Credit remains at 60 days
in thousands
	May	June	July	August	Sept.	October	Nov.	Dec.
Purchases	$675.0	$607.5	$585.0	$585.0	$585.0	$585.0	$585.0	$585.0
Payment		FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Accounts payable		945.0	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Labour			195.0	195.0	195.0	195.0	195.0	195.0
Selling & admin.			FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Other			375.0	375.0	375.0	375.0	375.0	375.0
Note payable				675.0			675.0
Interest						270.0
Taxes						338.0
Dividends			22.5			22.5
Total payments			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Cost of goods		FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
produced
Cost of goods sold					FORMULA			FORMULA
Inventory		8,231.0	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
	May	June	July	August	Sept.	October	Nov.	Dec.
Sales	1,732.5	1,845.0	1,957.5	2,070.0	2,205.0	2,362.5	2,475.0	2,565.0
Collections
60 days			CELL REF	CELL REF	CELL REF	CELL REF	CELL REF	CELL REF
50 days
42 days
35 days
Total collections			0.0	0.0	0.0	0.0	0.0	0.0
Accounts receivable		3,578.0	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
Receipts			0.0	0.0	0.0	0.0	0.0	0.0
less payments			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Net receipts			#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Accumulated cash		666.0	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA	FORMULA
		Toys for You
		Proforma Income Statement
				September	December
Sales				FORMULA	FORMULA
Cost of goods sold				CELL REF	CELL REF
Gross profit				FORMULA	FORMULA
Selling & admin.				#VALUE!	#VALUE!
Amortization				114.0	114.0
Operating Profit				#VALUE!	#VALUE!
Interest				0.0	270.0
Profit before taxes				#VALUE!	#VALUE!
Taxes (42%)				FORMULA	FORMULA
Net income				#VALUE!	#VALUE!
Dividends				22.5	22.5
To retained earnings				#VALUE!	#VALUE!
		Toys for You
		Proforma Balance Sheet
		Assets
			June 30	Sept 30	Dec 31
Current assets
Cash			666.0	CELL REF	CELL REF
Accounts receivable			3,578.0	CELL REF	CELL REF
Inventory			8,231.0	CELL REF	CELL REF
Total current assets			12,475.0	0.0	0.0
Capital assets
Plant & equipment			11,273.0	11,273.0	11,273.0
Accum. Amort.			4,784.0	4,898.0	5,012.0
Net capital assets			6,489.0	6,375.0	6,261.0
Total assets			18,964.0	19,159.0	18,998.0
		Liabilities and Shareholders' Equity
Current liabilities
Accounts payable			945.0	CELL REF	CELL REF
Notes payable			3,700.0	3,025.0	2,350.0
Accrued liabilities			2,596.0	2,596.0	2,596.0
Accrued taxes			0.0	CELL REF	#VALUE!
Total current liabilities			7,241.0	FORMULA	#VALUE!
Long term debt			4,725.0	4,725.0	4,725.0
Common stock			4,500.0	4,500.0	4,500.0
Retained earnings			2,498.0	FORMULA	FORMULA
Total liabilities and			18,964.0	19,159.5	18,998.5
shareholders' equity