EMBA 7015 Guidelines and Suggestions for Case 1, Problem 4.33 The "Toys For You" case provides several opportunities. First, you will be able to sharpen your skills in developing pro forma documents that will assist an organization's strategic planning process. Second you will be able to sharpen your managerial skills by analyzing the planning documents to determine the likely effects on financial health and goals if suggested policy changes are implemented. In other words, "Toys For You" has technical aspects and policy aspects. Should the contemplated policy changes be implemented, and what might happen to the organization if they are implemented? Without losing sight of the policy recommendations you are required to consider, the technical challenges of developing the forecast are considerable. This complex planning forecast requires the preparation and interpretation of several planning statements: 1. Pro forma monthly cash budget for July through December, 2016 2. Pro forma quarterly income statement for period ending Sep 2016 and period ending Dec 2016 3. Pro forma balance sheets as of Sep 30, 2016 and as of Dec 31, 2016. 1. Pro Forma Quarterly Income Statements These statements pose the least difficulties. For the Q3 Statement, start with the estimated sales for Jul- Sep; for the Q4 Statement, start with the estimated sales for Oct-Dec. For each statement, determine COGS using the information given, Selling and Administrative Expense using the information given, and amortization using the information given. Show Interest Expense in the Q4 Statement. Calculate taxes for each quarter using the information given. After determining Net Income for each quarter, allocate that income to Dividends and to Addition to Retained Earnings, using the information provided (it appears that dividends are declared quarterly). II. Pro Forma Monthly Cash Budget This budget should show the effects of the proposed level production schedule and the proposed change in collections. In addition, the payments for production and the collections on sales will impact the balance sheet entries for Accounts Payable, Inventory and Accounts Receivable. Many of the payments are easily determined. There is information for projected payments on labour expense, other expenses, and selling and administrative expense for example. There is additional information for other cash flows including payment of interest, taxes, dividends and payments to reduce notes payable. Monthly Payments on Purchases. Payments on purchases of materials are more problematical. Information is provided for purchases made in May and June and for the forecast period with level production. Further, these purchases are paid in 40 days. So how are payments against these purchases to be allocated month by month in the cash budget? For ease of calculation, assume that each month has 30 days. Then recognize that a 40-day payment plan extends over two months (60 days). If payments are made in 40 days, there are 60-40 = 20 days left in the two-month period. Allocate this 20 day residual to payments in the first month. Beginning with May purchases, allocate 20/30 = 2/3 to be paid in June. The remaining 1/3 of the May purchases will be paid in July, the first month of the planning period. But in the meantime, purchases were made in June. Allocate 2/3 of the June purchases also to be paid in July. So total payments in July consist of a 1/3 payment for May purchases, plus a 2/3 payment for June purchases. Now continue this allocation process for the rest of the planning period