Changes Ltd. owns a chain of eight stores selling fashion accessories. In the past the business maintained a healthy cash balance. However, this has fallen in recent months, and at the end of September 2010 the company had an overdraft of $70,000. In view of this, Changes Ltd.'s president has asked you to prepare a cash forecast for the next six months. You have collected the following data:

Inventory at October 1 amounted to $170,000 and accounts payable was $70,000. The purchases in October, November, and December are contractually committed, and those in January, February, and March are the minimum necessary to restock with spring fashions. Cost of goods sold is 50% of sales and suppliers allow one month's credit on purchases. Taxes of $90,000 are due on January 1. Other expenses include depreciation of $10,000 per month. Rent expense is paid six months in advance, in June and December.
Required:
(a) Calculate the forecast cash balance at the end of each month, for the six months ended March 31, 2011.
(b) Calculate the projected inventory levels at the end of each month for the six months to March 31, 2011.
(c) Prepare a pro forma income statement for the six months ended March 31, 2011.
(d) What problems might Changes Ltd. face in the next six months and how would you attempt to overcome them?

Transcribed Image Text:

Oct Nov. Dec lan. Feb. Mar Sales forecast Purchases Wages and salaries Rent Other expenses Renovations ($000) ($000) (000) ($000) ($000) ($000) 120 50 32 260 140 40 100 30 20 140 160 30 180 180 30 50 30 20 20 20 20 80