Construct the quarterly pro forma statements for 1992, quarterly Make sure that in a separate table, you show any assumptions that you have made, and in an adjacent cell, briefly justify your assumption For example, this assumption is stated in case or this rate is the average of the past 3 years etc For any projection, the case information has priority Otherwise, you can use your own justified assumption except for the one Page 3 the loan would be reduced to $3 million by January 31, 1992 Ignore this statement Instead, use the Plug to determine the companys need for short term bank loan (notes payable) in 1992 Be careful with the ratio computations when the data are quarterly Adjust the data where necessary so that the resulting ratios use our normal standards of comparison Refer to the slides that we have for annualizing ratios Note that the quarterly income statements in the case are cumulative within each year and that you will need to look at each quarter, not the cumulative amounts for all your calculations (e g , You care about the third quarter, not the 9 month period ending at the end of the third quarter) You can construct the quarterly income statements for a year by using the 3 month, subtracting the 3 month from the 6 month (to get the second quarter), subtracting the 6 month from the 9 month (to get the third quarter), and subtracting the 9 month from the 12 month income will be taken off for statements (to get the fourth quarter) If you do not construct these true quarterly income statements your quarterly calculations will all be wrong Of course, no adjustments are necessary for the balance sheets because they are snapshots not flows A stock dividend is not the same thing as a cash dividend With a stock dividend, the company gives each stockholder additional shares of stock in the company For example, if you owned 100 shares of stock and the company gave a 10 stock dividend you would own 110 shares afterwards There is no cash flow involved and there is no effect on the total equity of the business It is similar (but not identical) to the effect of a stock split Therefore, stock dividends do not appear on cash flow statements As a reminder, here is how to deal with changes in the goodwill for cash flow statements Any increase in the goodwill is a sign of investment, so it goes to the CFF Any decrease in the goodwill is a sign of depreciation, so the change will appear on CFO as a depreciation expense Data Comfort Zone Statements of Consolidated Income For Years Ended January 31 (Thousands of dollars) 1988 1989 1990 1991 Net Sales 45,852 64,335 85,362 108,255 Cost of Merchandise Sold 34,626 48,867 64,632 83,211 Gross Profit on Sales 11,226 15,468 20,730 25,044 Operating Expenses (note 1) 7,931 11,065 14,644 18,658 Profit from Operations 3,295 4,403 6,086 6,386 Other Income 27 123 195 600 Interest Expense 153 303 474 900 Income before Income Taxes 3,169 4,223 5,807 6,086 Provision for Income Taxes 1,168 1,616 2,474 2,417 Net Income 2,001 2,607 3,333 3,669 Note 1 Includes Provision for doubtful accounts N A N A N A 675 Depreciation expense N A N A N A 216 Consolidated Balance Sheets For Years Ended January 31 (Thousands of dollars) 1988 1989 1990 1991 Current Assets Cash 945 1,755 1,677 960 Accounts notes rec (net) 6,015 8,037 11,754 16,254 Inventories 11,739 12,975 20,133 25,008 Other current assets 63 15 60 306 Total current assets 18,762 22,782 33,624 42,528 Property, plant, equip (net) 1,257 1,266 2,028 2,280 Goodwill 543 507 1,131 1,062 Other Assets 57 66 72 18 Total 20,619 24,621 36,855 45,888 Current Liabilities Notes payable to banks 30 0 1,563 2,400 Current portion LTD 309 636 891 612 Trade accounts payable 3,480 3,696 8,550 10,245 Accrued liabilities 3,489 2,376 2,883 2,697 Total current liabilities 7,308 6,708 13,887 15,954 Long Term Debt 4,080 3,576 5,157 8,454 Stockholders' Equity Common stock $ 10 par 150 165 333 333 Other paid in capital 714 3,198 3,171 3,171 Retained earnings 8,367 10,974 14,307 17,976 Stockholders' equity 9,231 14,337 17,811 21,480 Total 20,619 24,621 36,855 45,888 Quarterly Statements of Consolidated Income For Years Ended January 31 (Thousands of dollars) 3 months 6 months 9 months 12 months 3 months 6 months 9 months 12 months 3 months 6 months Apr 89 Jul 89 Oct 89 Jan 90 Apr 90 Jul 90 Oct 90 Jan 91 Apr 91 Jul 91 Net Sales 17,262 41,061 64,656 85,362 22,947 54,186 82,875 108,255 23,943 57,147 Cost of Merchandise Sold 13,134 31,266 49,365 64,632 17,610 41,715 63,903 83,211 18,534 43,752 Gross Profit on Sales 4,128 9,795 15,291 20,730 5,337 12,471 18,972 25,044 5,409 13,395 Operating Expenses (note 1) 2,991 6,630 10,454 14,644 4,083 8,969 13,974 18,658 4,501 9,977 Profit from Operations 1,137 3,165 4,837 6,086 1,254 3,502 4,998 6,386 908 3,418 Other Income 33 72 108 195 36 219 408 600 267 450 Interest Expense 108 237 324 474 132 291 486 900 243 528 Income before Income Taxes 1,062 3,000 4,621 5,807 1,158 3,430 4,920 6,086 932 3,340 Provision for Income Taxes 453 1,284 1,975 2,474 456 1,357 1,920 2,417 365 1,312 Net Income 609 1,716 2,646 3,333 702 2,073 3,000 3,669 567 2,028 Quarterly Statements of Consolidated Income For Years Ended January 31 (Thousands of dollars) Apr 89 Jul 89 Oct 89 Jan 90 Apr 90 Jul 90 Oct 90 Jan 91 Apr 91 Jul 91 Current Assets Cash 1,983 1,488 1,353 1,677 2,031 1,794 1,197 960 1,692 1,248 Accounts notes rec 10,356 12,855 12,798 12,285 14,256 17,790 16,908 16,887 16,815 20,136 Allow for bad debts 474 690 903 531 729 939 1,239 633 699 828 Inventory 18,165 19,104 18,936 20,133 25,926 29,319 26,286 25,008 31,965 30,396 Prepaid and other 24 51 87 60 24 51 90 306 63 102 Total current assets 30,054 32,808 32,271 33,624 41,508 48,015 43,242 42,528 49,836 51,054 Property, plant equip 2,502 2,817 2,901 2,859 3,018 3,153 3,231 3,309 3,393 3,462 Accumulated depr 867 906 948 831 873 918 972 1,029 1,086 1,128 Net 1,635 1,911 1,953 2,028 2,145 2,235 2,259 2,280 2,307 2,334 Goodwill 1,185 1,182 1,149 1,131 1,116 1,098 1,080 1,062 1,044 1,026 Other Assets 87 66 54 72 123 72 75 18 93 66 Total 32,961 35,967 35,427 36,855 44,892 51,420 46,656 45,888 53,280 54,480 Current Liabilities Notes payable bank 1,002 2,334 1,641 1,563 2,400 3,000 2,700 2,400 2,400 4,200 Trade accounts payable 8,601 9,666 8,649 8,550 14,727 17,178 11,304 10,245 16,971 16,137 Current portion LTD 639 669 882 891 954 618 618 612 612 606 Accrued taxes 897 582 912 1,176 1,383 852 771 690 939 495 Other 1,113 1,023 1,128 1,707 1,416 1,110 1,680 2,007 1,866 1,359 Total current liab 12,252 14,274 13,212 13,887 20,880 22,758 17,073 15,954 22,788 22,797 Long Term Debt 5,628 5,499 5,091 5,157 5,499 8,778 8,772 8,454 8,445 8,175 Stockholders' Equity Common Stock 333 333 333 333 333 333 333 333 333 333 Paid in capital 3,165 3,171 3,171 3,171 3,171 3,171 3,171 3,171 3,171 3,171 Retained earnings 11,583 12,690 13,620 14,307 15,009 16,380 17,307 17,976 18,543 20,004 Stockholders' equity 15,081 16,194 17,124 17,811 18,513 19,884 20,811 21,480 22,047 23,508 Total 32,961 35,967 35,427 36,855 44,892 51,420 46,656 45,888 53,280 54,480

Question: Construct the quarterly pro-forma statements for 1992, quarterly. Make sure that in a separate table, you show any assumptions that you have made, and in

Construct the quarterly pro-forma statements for 1992, quarterly. Make sure that in a separate table, you show any assumptions that you have made, and in an adjacent cell, briefly justify your assumption. For example,” this assumption is stated in case” or “this rate is the average of the past 3 years” etc.

For any projection, the case information has priority. Otherwise, you can use your own justified assumption. except for the one:

Page 3: “... the loan would be reduced to $3 million by January 31, 1992.”

Ignore this statement. Instead, use the “Plug” to determine the company’s need for

short-term bank loan (notes payable) in 1992.

Be careful with the ratio computations when the data are quarterly. Adjust the data where necessary so that the resulting ratios use our normal standards of comparison. Refer to the slides that we have for annualizing ratios.

Note that the quarterly income statements in the case are cumulative within each year and that you will need to look at each quarter, not the cumulative amounts for all your calculations (e.g., You care about the third quarter, not the 9-month period ending at the end of the third quarter). You can construct the quarterly income statements for a year by using the 3-month, subtracting the 3-month from the 6-month (to get the second quarter), subtracting the 6-month from the 9- month (to get the third quarter), and subtracting the 9-month from the 12-month income

will be taken off for:

statements (to get the fourth quarter). If you do not construct these “true” quarterly income statements your quarterly calculations will all be wrong. Of course, no adjustments are necessary for the balance sheets because they are “snapshots” not “flows”.

A stock dividend is not the same thing as a cash dividend. With a stock dividend, the company gives each stockholder additional shares of stock in the company. For example, if you owned 100 shares of stock and the company gave a 10% stock dividend you would own 110 shares afterwards. There is no cash flow involved and there is no effect on the total equity of the business. It is similar (but not identical) to the effect of a stock split. Therefore, stock dividends do not appear on cash flow statements.

As a reminder, here is how to deal with changes in the goodwill for cash flow statements: Any increase in the goodwill is a sign of investment, so it goes to the CFF. Any decrease in the goodwill is a sign of depreciation, so the change will appear on CFO as a depreciation expense.

Data:

Comfort Zone

Statements of Consolidated Income
For Years Ended January 31
(Thousands of dollars)	1988	1989	1990	1991

Net Sales	45,852	64,335	85,362	108,255
Cost of Merchandise Sold	34,626	48,867	64,632	83,211
Gross Profit on Sales	11,226	15,468	20,730	25,044
Operating Expenses (note 1)	7,931	11,065	14,644	18,658
Profit from Operations	3,295	4,403	6,086	6,386
Other Income	27	123	195	600
Interest Expense	-153	-303	-474	-900
Income before Income Taxes	3,169	4,223	5,807	6,086
Provision for Income Taxes	1,168	1,616	2,474	2,417
Net Income	2,001	2,607	3,333	3,669

Note 1: Includes
Provision for doubtful accounts	N/A	N/A	N/A	675
Depreciation expense	N/A	N/A	N/A	216

Consolidated Balance Sheets
For Years Ended January 31
(Thousands of dollars)	1988	1989	1990	1991

Current Assets:
Cash	945	1,755	1,677	960
Accounts & notes rec. (net)	6,015	8,037	11,754	16,254
Inventories	11,739	12,975	20,133	25,008
Other current assets	63	15	60	306
Total current assets	18,762	22,782	33,624	42,528
Property, plant, & equip. (net)	1,257	1,266	2,028	2,280
Goodwill	543	507	1,131	1,062
Other Assets	57	66	72	18
Total	20,619	24,621	36,855	45,888

Current Liabilities:
Notes payable to banks	30	0	1,563	2,400
Current portion - LTD	309	636	891	612
Trade accounts payable	3,480	3,696	8,550	10,245
Accrued liabilities	3,489	2,376	2,883	2,697
Total current liabilities	7,308	6,708	13,887	15,954
Long-Term Debt	4,080	3,576	5,157	8,454
Stockholders' Equity:
Common stock - $.10 par	150	165	333	333
Other paid-in capital	714	3,198	3,171	3,171
Retained earnings	8,367	10,974	14,307	17,976
Stockholders' equity	9,231	14,337	17,811	21,480
Total	20,619	24,621	36,855	45,888


Quarterly Statements of Consolidated Income
For Years Ended January 31
(Thousands of dollars)	3 months	6 months	9 months	12 months	3 months	6 months	9 months	12 months	3 months	6 months
	Apr-89	Jul-89	Oct-89	Jan-90	Apr-90	Jul-90	Oct-90	Jan-91	Apr-91	Jul-91

Net Sales	17,262	41,061	64,656	85,362	22,947	54,186	82,875	108,255	23,943	57,147
Cost of Merchandise Sold	13,134	31,266	49,365	64,632	17,610	41,715	63,903	83,211	18,534	43,752
Gross Profit on Sales	4,128	9,795	15,291	20,730	5,337	12,471	18,972	25,044	5,409	13,395
Operating Expenses (note 1)	2,991	6,630	10,454	14,644	4,083	8,969	13,974	18,658	4,501	9,977
Profit from Operations	1,137	3,165	4,837	6,086	1,254	3,502	4,998	6,386	908	3,418
Other Income	33	72	108	195	36	219	408	600	267	450
Interest Expense	-108	-237	-324	-474	-132	-291	-486	-900	-243	-528
Income before Income Taxes	1,062	3,000	4,621	5,807	1,158	3,430	4,920	6,086	932	3,340
Provision for Income Taxes	453	1,284	1,975	2,474	456	1,357	1,920	2,417	365	1,312
Net Income	609	1,716	2,646	3,333	702	2,073	3,000	3,669	567	2,028

Quarterly Statements of Consolidated Income
For Years Ended January 31
(Thousands of dollars)	Apr-89	Jul-89	Oct-89	Jan-90	Apr-90	Jul-90	Oct-90	Jan-91	Apr-91	Jul-91

Current Assets:
Cash	1,983	1,488	1,353	1,677	2,031	1,794	1,197	960	1,692	1,248
Accounts & notes rec.	10,356	12,855	12,798	12,285	14,256	17,790	16,908	16,887	16,815	20,136
Allow for bad debts	-474	-690	-903	-531	-729	-939	-1,239	-633	-699	-828
Inventory	18,165	19,104	18,936	20,133	25,926	29,319	26,286	25,008	31,965	30,396
Prepaid and other	24	51	87	60	24	51	90	306	63	102
Total current assets	30,054	32,808	32,271	33,624	41,508	48,015	43,242	42,528	49,836	51,054
Property, plant & equip.	2,502	2,817	2,901	2,859	3,018	3,153	3,231	3,309	3,393	3,462
Accumulated depr.	-867	-906	-948	-831	-873	-918	-972	-1,029	-1,086	-1,128
Net	1,635	1,911	1,953	2,028	2,145	2,235	2,259	2,280	2,307	2,334
Goodwill	1,185	1,182	1,149	1,131	1,116	1,098	1,080	1,062	1,044	1,026
Other Assets	87	66	54	72	123	72	75	18	93	66
Total	32,961	35,967	35,427	36,855	44,892	51,420	46,656	45,888	53,280	54,480

Current Liabilities:
Notes payable-bank	1,002	2,334	1,641	1,563	2,400	3,000	2,700	2,400	2,400	4,200
Trade accounts payable	8,601	9,666	8,649	8,550	14,727	17,178	11,304	10,245	16,971	16,137
Current portion-LTD	639	669	882	891	954	618	618	612	612	606
Accrued taxes	897	582	912	1,176	1,383	852	771	690	939	495
Other	1,113	1,023	1,128	1,707	1,416	1,110	1,680	2,007	1,866	1,359
Total current liab.	12,252	14,274	13,212	13,887	20,880	22,758	17,073	15,954	22,788	22,797
Long-Term Debt	5,628	5,499	5,091	5,157	5,499	8,778	8,772	8,454	8,445	8,175
Stockholders' Equity:
Common Stock	333	333	333	333	333	333	333	333	333	333
Paid-in capital	3,165	3,171	3,171	3,171	3,171	3,171	3,171	3,171	3,171	3,171
Retained earnings	11,583	12,690	13,620	14,307	15,009	16,380	17,307	17,976	18,543	20,004
Stockholders' equity	15,081	16,194	17,124	17,811	18,513	19,884	20,811	21,480	22,047	23,508
Total	32,961	35,967	35,427	36,855	44,892	51,420	46,656	45,888	53,280	54,480

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