Module Two 2011 this module will focus upon the development of pro forma financial statements given various planning assumptions.

Mansfield Corporation makes standard sized widgets for the widget industry. These widgets are sold for $235 per thousand. Mr. Smith and Mr. John are asking you to assist with preparations for a meeting with their banker to arrange for financing the company for possible expansion. Based on a sales forecast (below) and other data, Mr. Smith and Mr. John would like you to prepare a monthly cash budget, monthly and quarterly pro forma income statements, a pro forma quarterly balance sheet, and all necessary supporting schedules for the first quarter of 2012.

Sales forecast (in units):

• Jan --2,150,000 Sales-units $505,250
• Feb 2,350,000 Sales units 552,250
• March 1,950,000 Sales $458,250
• April 1,750,000 Sales $411,250
• May 2,150,000 Sales $505,250

Prior history shows that the company collects 75% of the sales in the first month after the sale, 20% in the second month after the sale, and the remainder in the third month after the sale. The company pays for materials purchased for production the month after receipt. In general, Mr. Smith and Mr. Smith like to keep 1.5 months supply of inventory on-hand at month-end in anticipation of sales. Inventory at the beginning of December was 2,400,000 units. Additionally, the unit sales for October, November and December were 1,900,000, 1,850,000 and 1,325,000, respectively.

The major cost of production is the purchase of raw materials in the form of steel rods, which are cut, threaded, and finished. Last year raw material costs were $63 per 1,000 widgets, but Mr. Smith was notified by the purchasing department that the cost was going to rise to $68 per 1,000 widgets. The company uses FIFO inventory accounting and the purchases for materials are paid for in the month following the purchase. Labor costs are relatively constant at $22 per thousand widgets, since workers are paid on a piecework basis. Overhead is allocated at $12 per thousand widgets and selling and administrative costs are constant at 28% of sales revenue. Labor expense and overhead are direct cash outflows paid in the month incurred, while interest and taxes are paid quarterly. In addition, the company maintains a dividend payout ratio of 40% which is paid quarterly.

The company usually maintains a minimum cash balance of $45,000, borrows notes payable if needed, and puts any excess cash into marketable securities. The average tax rate is 30%. Marketable securities are sold before funds are borrowed when a cash shortage is faced. Ignore the interest on short-term borrowings. Interest on the long-term bonds of $9,000 is paid in March, but is allocated over each month for accounting purposes. Taxes are paid in March, but are allocated over each month for accounting purposes. The Dividend payment is made at the end of March. In addition, the company is projecting the purchase of a new piece of manufacturing equipment in March for $50,000 that will be cash on delivery.

part 1: Prepare a monthly pro forma income statement and cash budget, and a quarter-ended income statement; make sure to include a sales forecast, production schedule, schedule of cost of goods sold, schedule of cash receipts, schedule of cash payments, net cash flow schedule, and the cash budget. All supporting schedules should include all three months of the quarter.

part 2: Based on the date prepared in part 1, prepare a balance sheet as of the quarter-ended date. Make sure to include a schedule that identifies the calculation of accounts receivable, inventory, and accounts payable balances for each month and for the quarter-ended period.
As of the year ended December 31, 2011, the Smith-John balance sheet was as follows.