How do you interpret the negative numbers for income taxes

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Reference no: EM13892260

Toys-4-Kids manufactures plastic toys. Sales and production are highly seasonal. The following list of figures is a quarterly pro forma forecast indicating external financing needs for 2012. Assumptions are in parentheses.

Toys-4-Kids
2012 Quarterly Pro Forma Forecast
($ thousands)

 

Qtr 1 Qtr 2

Qtr 3

Qtr 4

Net sales $ 300 $ 375 $3,200 $5,000

Cost of sales (70% of sales)

    210

    263

  2,240

  3,500

Gross profit

90

113

960

1,500

Operating expenses

    560

    560

    560

    560

Profit before tax

(470)

(448)

400

940

Income taxes

   (188)

   (179)

    160

    376

Profit after tax

($ 282)

($ 269)

$ 240

$ 564

Cash (minimum balance = $200,000)

$1,235

$ 927

$ 200

$ 200

Accounts receivable (75% of quarterly sales)

225

281

2,400

3,750

Inventory (12/31/11 balance = $500,000)

    500

    500

    500

    500

Current assets

1,960

1,990

3,120

4,450

Net plant & equipment

  1,000

  1,000

  1,000

  1,000

Total assets

$ 2,960

$2,708

$4,100

$5,450

Accounts payable (10% of quarterly sales)

30

38

320

500

Accrued taxes (payments quarterly in arrears)

   (188)

   (179)

    160

    376

Current liabilities

(158)

(142)

480

876

Long-term debt

400

400

400

400

Equity (12/31/11 balance = $3,000,000)

  2,718

  2,450

  2,690

  3,254

Total liabilities and equity

$2,960

$2,708

$3,570

$4,530

External financing required

$     0

$     0

$ 530

$ 920

a. How do you interpret the negative numbers for income taxes in the first two quarters?

b. Why are cash balances in the first two quarters greater than the minimum required $200,000? How were these numbers determined?

c. How was "external financing required" appearing at the bottom of the forecast determined?

d. Do you think Toys-4-Kids will be able to borrow the external financing required as indicated by the forecast?

Reference no: EM13892260

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