Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows:
End of the year information:
|Account||12/31/17 Ending Balance|
|Short-term Notes Payable||12,000|
|Long-term Notes Payable||200,000|
- Sales for December total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $25 per unit.
- Company policy calls for a given month’s ending inventory to equal 80% of the next month’s expected unit sales. The December 31 2017 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit.
- Sales representatives’ commissions are 12.5% of sales and are paid in the month of the sales. The sales manager’s monthly salary will be $3,500 in January and $4,000 per month thereafter.
- Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable.
- The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of sale).
- All merchandise purchases are on credit, and no payables arise from any other transactions. One month’s purchases are fully paid in the next month.
- The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
- Dividends of $100,000 are to be declared and paid in February.
- No cash payments for income taxes are to be made during the first calendar quarter. Income taxes will be assessed at 35% in the quarter.
- Equipment purchases of $55,000 are scheduled for March.
ABC Company’s management is also considering 3 new projects consisting of the purchase of new equipment. The company has limited resources, and may not be able to complete make all 3 purchases. The information is as follows for the purchases below:
|Project 1||Project 2||Project 3|
|Required Rate of Return||6%||8%||12%|
|Time Period||3 years||5 years||2 years|
|Cash Flows – Year 1||$48,000||$85,000||$13,000|
|Cash Flows – Year 2||$36,000||$74,000||$13,000|
|Cash Flows – Year 3||$22,000||$38,000||N/A|
|Cash Flows – Year 4||N/A||$26,800||N/A|
|Cash Flows – Year 5||N/A||$19,000||N/A|
- Prepare the year-end balance sheet for 2017. Be sure to use proper headings.
- Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 may be prepared.
- Sales budget, including budgeted sales for April.
- Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the March 31 budgeted inventory.
- Selling expense budget.
- General and administrative expense budget.
- Expected cash receipts from customers and the expected March 31 balance of accounts receivable.
- Expected cash payments for purchases and the expected March 31 balance of accounts payable.
- Cash budget.
- Budgeted income statement.
- Budgeted statement of retained earnings.
- Budgeted balance sheet.
- Calculate using Excel formulas, the NPV of each of the 3 projects.
- It is possible that ABC Company may not be able to complete all 3 projects. Therefore, advise ABC Company as to the order in which they should pursue the projects (i.e., which project should ABC Company attempt to do first, second, and last).
- Provide justification and analysis as to why you chose the order you did. The analysis must also be done in Excel, not in a separate document.
This assignment must be submitted as one Excel document.
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