Case Analysis #3
1. It appears that the drastic increase in inventories is responsible for the company’s inability to repay its loan on time.

Cash Budget
A/R 684,000 1,323,000 779,000 1,604,000
Bank Loan 0 350,000 0 0
Total Cash Receipts 684,000 1,673,000 779,000 1,604,000

A/P 948,000 600,000 600,000 600,000
Operating Expenses 400,000 400,000 400,000 400,000
Tax Payments 181,000 0 0 181,000
Equipment 0 350,000 0 0
Int. Expense 15,000 15,000 20,250 20,250
Loan Principal 0 0 0 1,350,000
Dividends 0 0 0 150,000
Total Disbursement 1,544,000 1,365,000 1,020,250 2,701,250

Cash Balance, beg. 1,559,000 699,000 1,007,000 765,750
NCF -860,000 308,000 -241,250 -1,097,250
Cash Balance, end. 699,000 1,007,000 765,750 -331,500

Total Int. Payments 70,500

Pro Forma Income Statement September – December 1979 Sales $7,537
Cost of sales $5,740
Other expenses 117

Profit before tax $1,680
Taxes 771

Profit after taxes $909
Dividends 150

Addition to retained earnings $759

Pro Forma Balance Sheet December 31, 1979
Cash $(331) Plug
Accounts receivable 2,265
Inventories 3,024
Total current assets $4,958
Gross fixed assets $4,300
Acc. Depreciation 3,137
Net fixed assets $1,223
Prepaid expenses 42
Total assets $6,223
Accounts payable $600