Toy World Inc. Case Study

Exhibit 1 Pro Forma Balance Sheets Under Seasonal production, 1994 (thousands of dollars) Actual Dec. 31, 1993 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Cash $200 $878 $1,526 $1,253 $1,054 $915 $696 $527 $200 $200 $200 $200 $200 Accounts Receivable 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400 Inventory 586 1,050 1,502 1,940 2,391 2,843 3,294 3,733 3,220 2,565 1,714 769 586 Current assets $3,691 $2,988 $3,288 $3,493 $3,745 $4,038 $4,270 $4,560 $5,200 $6,225 $5,894 $5,394 $4,186 Net plant and equipment 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 Total assets $4,867 $4,164 $4,464 $4,669 $4,921 $5,214 $5,446 $5,736 $6,376 $7,401 $7,070 $6,570 $5,362 Accounts payable $282 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 Notes payable bank 752 254 714 1,160 1,608 2,062 2,517 2,961 3,250 3,888 3,036 1,964 649 Accrued taxes 88 29 (25) (165) (255) (310) (400) (453) (333) (225) (47) 147 169 Long-term debt, current portion

 

COMM 371, Lecture 7

3

What we will do

Assess Toy World’s need for external financing under its current(seasonal) production plan. Discuss the timing, magnitude, andduration of borrowing needs, and risk.

Assess Toy World’s need for external financing under theproposed level production plan

Conceptual discussion

The mechanics of preparing the pro forma incomestatement and balance sheet

Would a bank be likely to provide the financing necessary underthe smooth production plan?

Would you recommend adoption of the level production plan?

Cost savings versus risks

COMM 371, Lecture 7

4

The Current (Seasonal) Production Plan

Production is approximately equal to sales (production in responseto customer orders). Cost and benefit of the seasonal productionplan:

Inventory

Inventory is minimized and the funds necessary to financeinventory is minimized.

Inventory risk is minimized.

Costs

Overtime premiums in high season (reduces profits)

Difficulty in scheduling production runs & shorterproduction runs

Fixed capital is underused part of the year and then run tocapacity

Seasonal financing requirements

Primarily receivables financing during the collection lagafter the months of peak sales (lag is 60 days)

The firm stays comfortably within its current credit line (itis owing $752 thousands at the end of 1993, and the bank is willing to extend a credit line of up to $2 million in1994)

Cash balance stays at a minimum required to financeoperations

See pro-forma IS and BS for seasonal production plan

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