Assume ABC Company has asked you to not only prepare their 2013 year-end Balance Sheet but to also provide pro-forma financial statements for the first quarter of 2014 (that is, January - March 2014). They also want you to evaluate 3 projects they are considering. Their information is as follows:

End of the year information:

Account	12/31/13 Ending Balance
Cash	160,000
Accounts Receivable	126,000
Inventory	75,200
Equipment	745,000
Accumulated Depreciation	292,460
Accounts Payable	36,900
Short-term Notes Payable	18,300
Long-term Notes Payable	157,225
Common Stock	450,000
Retained Earnings	Solve for this

 

Additional Information:

• Sales for December total 12,000 units. Each month’s unit sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $15 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, 2013 inventory is 9,400 units, which complies with the policy. The purchase price is $8 per unit.

• Sales representatives’ commissions are 10.0% 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 $160,000. 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 all 3 purchases. The information for the purchases is as follows:

Â	Project 1	Project 2	Project 3
Purchase Price	$50,000	$75,000	$32,500
Required Rate of Return	12%	8%	10%
Time Period	3 years	5 years	2 years
Cash Flows – Year 1	$18,000	$25,000	$20,000
Cash Flows – Year 2	$22,000	$20,000	$18,000
Cash Flows – Year 3	$22,000	$18,000	N/A
Cash Flows – Year 4	N/A	$16,500	N/A
Cash Flows – Year 5	N/A	$15,000	N/A

 

Required Action:

Part A:

• Prepare the year-end balance sheet for 2013. Be sure to use proper headings.
• Prepare budgets such that the pro-forma financial statements 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.

[Hint: The End-of-Chapter Challenge for Chapter 4 of the Textbook provides a template to guide you in the preparation of all the necessary budgets and financial statements.]

Part B:

• 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.