Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following list of figures is a quarterly pro forma forecast indicating external financing needs for 2012. Assumptions are in parentheses.
Toys-4-Kids
2012 Quarterly Pro Forma Forecast
($ thousands) |
|
|
Qtr 1 |
Qtr 2 |
Qtr 3
|
Qtr 4
|
| Net sales |
$ 300 |
$ 375 |
$3,200 |
$5,000 |
|
Cost of sales (70% of sales)
|
210
|
263
|
2,240
|
3,500
|
|
Gross profit
|
90
|
113
|
960
|
1,500
|
|
Operating expenses
|
560
|
560
|
560
|
560
|
|
Profit before tax
|
(470)
|
(448)
|
400
|
940
|
|
Income taxes
|
(188)
|
(179)
|
160
|
376
|
|
Profit after tax
|
($ 282)
|
($ 269)
|
$ 240
|
$ 564
|
|
Cash (minimum balance = $200,000)
|
$1,235
|
$ 927
|
$ 200
|
$ 200
|
|
Accounts receivable (75% of quarterly sales)
|
225
|
281
|
2,400
|
3,750
|
|
Inventory (12/31/11 balance = $500,000)
|
500
|
500
|
500
|
500
|
|
Current assets
|
1,960
|
1,990
|
3,120
|
4,450
|
|
Net plant & equipment
|
1,000
|
1,000
|
1,000
|
1,000
|
|
Total assets
|
$ 2,960
|
$2,708
|
$4,100
|
$5,450
|
|
Accounts payable (10% of quarterly sales)
|
30
|
38
|
320
|
500
|
|
Accrued taxes (payments quarterly in arrears)
|
(188)
|
(179)
|
160
|
376
|
|
Current liabilities
|
(158)
|
(142)
|
480
|
876
|
|
Long-term debt
|
400
|
400
|
400
|
400
|
|
Equity (12/31/11 balance = $3,000,000)
|
2,718
|
2,450
|
2,690
|
3,254
|
|
Total liabilities and equity
|
$2,960
|
$2,708
|
$3,570
|
$4,530
|
|
External financing required
|
$ 0
|
$ 0
|
$ 530
|
$ 920
|
a. How do you interpret the negative numbers for income taxes in the first two quarters?
b. Why are cash balances in the first two quarters greater than the minimum required $200,000? How were these numbers determined?
c. How was "external financing required" appearing at the bottom of the forecast determined?
d. Do you think Toys-4-Kids will be able to borrow the external financing required as indicated by the forecast?