Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 may be prepared

INSTRUCTIONS TO CANDIDATES

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Excel Project Assignment Instructions

Overview

Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows:

End of the year information:

 Additional Information:

·  Sales for December total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $25 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 2017 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit.

· Sales representatives’ commissions are 12.5% 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 $50,000. 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 make all 3 purchases. The information is as follows for the purchases below:

Instructions

 

Part A:

• Prepare the year-end balance sheet for 2017. Be sure to use proper headings.
• Prepare budgets such that the pro-forma financial statements for the first quarter of 2018 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.

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.

 This assignment must be submitted as one Excel document.

Attachments:

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