Question Solved1 Answer Fax Corporation's income statement and balance sheet for the year ended December 31, Year 1, are reproduced below: FAX CORPORATION Income Statement For Year Ended December 31, Year 1 $ 960,000 (550,000) 410,000 Net sales...... Cost of goods sold (excluding depreciation). Gross profit..... Depreciation expense Selling and administrative expenses Income before taxes .... Income taxes (state and federal) Net income $ 30,000 160,000 (190,000) 220,000 (105,600) $ 114,400 Page 605 FAX CORPORATION Balance Sheet December 31, Year 1 Assets Current assets Cash ..... Marketable securities Accounts receivable.. Inventory..... Total current assets. Plant and equipment... Less: Accumulated depreciation Total assets.. $ 30,000 5,500 52,000 112,500 $200,000 630,000 (130,000) 500,000 $700,000 $ 60,000 50,000 Liabilities and Equity Current liabilities Accounts payable Notes payable ..... Total current liabilities Long-term debt ... Equity Capital stock. ... Retained earnings. Total liabilities and equity. $110,000 150,000 250,000 190,000 440,000 $700,000 Additional Information: 1. Purchases in Year 1 are $480.000. 2. In Year 2, management expects 15% sales growth and a 10% increase in all expenses except for depreciation, which increases by 5%. 3. Management expects an inventory turnover ratio of 5.5 for Year 2. 4. A receivable collection period of 90 days, based on year-end accounts receivable, is planned for Year 2. 5. Year 2 income taxes, at the same rate of pretax income for Year 1, will be paid in cash. 6. Notes payable at the end of Year 2 will be $30,000. 7. Long-term debt of $25,000 will be paid in Year 2. 8. FAX desires a minimum cash balance of $20,000 in Year 2. 9. The ratio of accounts payable to purchases for Year 2 is the same as in Year 1. 10. All selling and administrative expenses will be paid in cash in Year 2. 11. Marketable securities and equity accounts at the end of Year 2 are the same as in Year 1. Required: a. Prepare a statement of forecasted cash inflows and outflows (what-if analysis) for the year ended December 31, Year 2. 5. Will FAX Corporation have to borrow money in Year 2?

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Transcribed Image Text: Fax Corporation's income statement and balance sheet for the year ended December 31, Year 1, are reproduced below: FAX CORPORATION Income Statement For Year Ended December 31, Year 1 $ 960,000 (550,000) 410,000 Net sales...... Cost of goods sold (excluding depreciation). Gross profit..... Depreciation expense Selling and administrative expenses Income before taxes .... Income taxes (state and federal) Net income $ 30,000 160,000 (190,000) 220,000 (105,600) $ 114,400 Page 605 FAX CORPORATION Balance Sheet December 31, Year 1 Assets Current assets Cash ..... Marketable securities Accounts receivable.. Inventory..... Total current assets. Plant and equipment... Less: Accumulated depreciation Total assets.. $ 30,000 5,500 52,000 112,500 $200,000 630,000 (130,000) 500,000 $700,000 $ 60,000 50,000 Liabilities and Equity Current liabilities Accounts payable Notes payable ..... Total current liabilities Long-term debt ... Equity Capital stock. ... Retained earnings. Total liabilities and equity. $110,000 150,000 250,000 190,000 440,000 $700,000 Additional Information: 1. Purchases in Year 1 are $480.000. 2. In Year 2, management expects 15% sales growth and a 10% increase in all expenses except for depreciation, which increases by 5%. 3. Management expects an inventory turnover ratio of 5.5 for Year 2. 4. A receivable collection period of 90 days, based on year-end accounts receivable, is planned for Year 2. 5. Year 2 income taxes, at the same rate of pretax income for Year 1, will be paid in cash. 6. Notes payable at the end of Year 2 will be $30,000. 7. Long-term debt of $25,000 will be paid in Year 2. 8. FAX desires a minimum cash balance of $20,000 in Year 2. 9. The ratio of accounts payable to purchases for Year 2 is the same as in Year 1. 10. All selling and administrative expenses will be paid in cash in Year 2. 11. Marketable securities and equity accounts at the end of Year 2 are the same as in Year 1. Required: a. Prepare a statement of forecasted cash inflows and outflows (what-if analysis) for the year ended December 31, Year 2. 5. Will FAX Corporation have to borrow money in Year 2?
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Transcribed Image Text: Fax Corporation's income statement and balance sheet for the year ended December 31, Year 1, are reproduced below: FAX CORPORATION Income Statement For Year Ended December 31, Year 1 $ 960,000 (550,000) 410,000 Net sales...... Cost of goods sold (excluding depreciation). Gross profit..... Depreciation expense Selling and administrative expenses Income before taxes .... Income taxes (state and federal) Net income $ 30,000 160,000 (190,000) 220,000 (105,600) $ 114,400 Page 605 FAX CORPORATION Balance Sheet December 31, Year 1 Assets Current assets Cash ..... Marketable securities Accounts receivable.. Inventory..... Total current assets. Plant and equipment... Less: Accumulated depreciation Total assets.. $ 30,000 5,500 52,000 112,500 $200,000 630,000 (130,000) 500,000 $700,000 $ 60,000 50,000 Liabilities and Equity Current liabilities Accounts payable Notes payable ..... Total current liabilities Long-term debt ... Equity Capital stock. ... Retained earnings. Total liabilities and equity. $110,000 150,000 250,000 190,000 440,000 $700,000 Additional Information: 1. Purchases in Year 1 are $480.000. 2. In Year 2, management expects 15% sales growth and a 10% increase in all expenses except for depreciation, which increases by 5%. 3. Management expects an inventory turnover ratio of 5.5 for Year 2. 4. A receivable collection period of 90 days, based on year-end accounts receivable, is planned for Year 2. 5. Year 2 income taxes, at the same rate of pretax income for Year 1, will be paid in cash. 6. Notes payable at the end of Year 2 will be $30,000. 7. Long-term debt of $25,000 will be paid in Year 2. 8. FAX desires a minimum cash balance of $20,000 in Year 2. 9. The ratio of accounts payable to purchases for Year 2 is the same as in Year 1. 10. All selling and administrative expenses will be paid in cash in Year 2. 11. Marketable securities and equity accounts at the end of Year 2 are the same as in Year 1. Required: a. Prepare a statement of forecasted cash inflows and outflows (what-if analysis) for the year ended December 31, Year 2. 5. Will FAX Corporation have to borrow money in Year 2?
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a)  FAX CorporationForecasted Statement of Cash Receipts and Payments For Year Ended December 31,Year 2 Notes Note 1: Sales for Year 2 = Sales for Year 1 x 115% = $960,000 x 1.15 = $1,104,000 Note 2: Ending A.R. = Average daily sales x Collection period = $1,104,000 x 90/360 = $276,000 Note 3: Purchases (Year 2) = COGS + Ending inventory - Beginning inventory COGS (Year 2) = COGS (Year 1) x 110% = $550,000 x 1.1 = $605,000 Average Inventory = COGS / Average inventory turnover = $605,000 / 5.5 = 110,000 Ending inventory = (Average inventory x 2) - (Beginning Inventory) = $110,000 x 2 - $112,500 = $107,500 Purchases (Y ... See the full answer