Scradley Incorporated Scradley Incorporated Scradley Incorporated
Income Statement Balance Sheet Cash Flow Statement
For the Year Ended December 31, 2019 As At December 31, 2019 For the Year Ended December 31, 2019
(in $ thousands) (in $ thousands) (in $ thousands)
2019 2018 Operating
Sales Revenue 4500 100% Current Assets Non Cash Working Capital
Less Cost of Goods Sold: Cash 618 180 Marketable securities 200
Opening Inventory 1250 28% Marketable securities 0 200 Accounts receivable -40
Add: Purchases 2100 47% Accounts receivable 480 440 Inventory -45
Goods Available for Sale 3350 74% Inventory 1295 1250 Prepaid expenses 20
Closing Inventory 1295 0.00% Prepaid expenses 120 140 Line of Credit -100
Total COGS 2055 46% Total current assets 2513 2210 Accounts payable 20
Gross Profit 2445 54% Property, Plant & Eqpt Prepaid revenue 20
Operating Expenses: Land 1300 950 Total NCWC 75
Rent and Occupancy 450 10% Buildings 1200 1150 Amortization 125
Salaries/Bonuses 680 15% Accumulated depreciation -450 -410 Net Income 668
Ad & Promo (Mktg) 280 6% Furniture & fixtures 285 230 Total Operating 868
Maintenance 80 2% Accumulated depreciation -190 -140 Investing
Amortization 125 1615 36% Motor vehicles 290 245 Land -350
Earnings Before Tax (Operating Income) 830 18% Accumulated depreciation -210 -175 Buildings -50
Income Tax 162 4% Total PP&E 2225 1850 Furniture -55
Net Income 668 15% Total Assets 4738 4060 Motor Vehicles -45
Equipment 0
Scradley Incorporated Current Liabilities Total Investing -500
Statement of Retained Earnings Line of Credit 20 120
For the Year Ended December 31, 2019 Accounts payable 350 330 Financing
(in $ thousands) Prepaid revenue 440 420 LT Bank Loan 250
Total current liabilities 810 870 Shareholder Loan 0
Opening Retained Earnings 1890 Long-term Liabilities Leases -30
Plus: Net Profit (Loss) 668 LT Bank Loan 900 650 Pref Shares 0
Minus: Dividends 200 Shareholder Loan 400 400 Common Shares 50
Closing Retained Earnings 2358 Leases 120 150 Dividends -200
Total LT liabilities 1420 1200 Total Financing 70
To calculate taxes: Shareholder Equity
500 15% 75 Preferred shares 50 50 Net Cash Flow 438
330 26.5% 87.45 Common shares 100 50
162.45 Round off Retained earnings 2358 1890 Opening Cash 180
Total shareholder equity 2508 1990 Closing Cash 618
Total Liabilities & Shareholder Equity 4738 4060

PROFORMA FINANCIAL ASSIGNMENT

Attached are the four financial statements for Scradley Incorporated for 2019.
The company is considering a new strategy for the coming year with the following elements:
1. A new marketing campaign that involves increasing marketing spending to 10% of sales, up from the current amount, coupled with a relaxation of credit policies are expected to result in sales increasing by 25% in the coming year.
2. The aforementioned “relaxation” of credit policy will extend payment terms to 45 days.
3. Cutting their inventory costs by keeping to the same closing inventory level as in the previous year, even though their sales are expected to be higher.
Cost of Goods Sold is expected to be the same %-age of revenue.
[Note: in this case you won’t NEED to calculate purchases but I want you to do it anyway.]
4. Leasing new equipment for $200,000 that will use the raw materials more effectively, and therefore allow the planned reduction in inventory. The new equipment will be depreciated at 10% per year.
All other accounts will maintain their current proportion to the new sales revenue, except as follows:
• Prepaid expenses will increase to $180K, due to some really great deals we’ve made.
• Assume the same DOLLAR($) amount of accumulated depreciation for the previous assets. Don’t forget the additional depreciation of the new equipment.
• The income tax should be calculated as follows:
o 1st $500K: 15%
o Remainder: 26.5%
They are paying down the line of credit.
New Preferred shares will be issued in the amount of $50,000
Dividends will increase by 50%.
All long-term liabilities will be kept the same except for the increase in liability for leases (since they are leasing the new equipment), and they’d like to pay down $100k of the shareholder loans.

ASSIGNMENT:
Prepare a proforma Income Statement, Balance Sheet, Cashflow, and Statement of Retained Earnings for the company, based on the above information, for the year ending December 31, 2020.
Use “cash” as the “plug figure” to make the Balance Sheet balance.
This assignment is worth 15% of your grade, broken down as follows:
Income Statement: 4 points
Statement of retained earnings: 1 point
Balance Sheet: 4 points
Cash Flow Statement: 3 Points
And 3 points for answering the following two questions:
Critique this new strategy from the point of view of the company’s bank (1.5)
From the point of view of a SHAREHOLDER (1.5)

FORMAT:
1. Submit only one WORD DOCUMENT as your submission.
2. Each statement must fit on the page of the word doc, EXACTLY like the examples below. (The income statement and Stmt of Ret. Earning go on one page).
NO statement may cross a page break. Make them fit! The two questions should also be answered on a single page (not each, both should fit on one)
3. Minimum 11 point font, preferably 12. Use a sans serif font. In fact, use the same font I used in the excel doc!
3 pages for the statements
2 page for answers to the two questions.
Note:
There is an excel file on D2l with the following statements already populated which you can use for your calculations (but NOT submission – see above).

Scradley Incorporated
Income Statement
For the Year Ended December 31, 2019
(in $ thousands)

Sales Revenue 4500 100%
Less Cost of Goods Sold:
Opening Inventory 1250 28%
Add: Purchases 2100 47%
Goods Available for Sale 3350 74%
Closing Inventory 1295 0.00%
Total COGS 2055 46%
Gross Profit 2445 54%
Operating Expenses:
Rent and Occupancy 450 10%
Salaries/Bonuses 680 15%
Ad & Promo (Mktg) 280 6%
Maintenance 80 2%
Amortization 125 1615 36%
Earnings Before Tax (Operating Income) 830 18%
Income Tax 162 4%
Net Income 668 15%

Scradley Incorporated
Statement of Retained Earnings
For the Year Ended December 31, 2019
(in $ thousands)

Opening Retained Earnings 1890
Plus: Net Profit (Loss) 668
Minus: Dividends 200
Closing Retained Earnings 2358

Scradley Incorporated
Balance Sheet
As At December 31, 2019
(in $ thousands)
2019 2018
Current Assets
Cash 618 180
Marketable securities 0 200
Accounts receivable 480 440
Inventory 1295 1250
Prepaid expenses 120 140
Total current assets 2513 2210
Property, Plant & Eqpt
Land 1300 950
Buildings 1200 1150
Accumulated depreciation -450 -410
Furniture & fixtures 285 230
Accumulated depreciation -190 -140
Motor vehicles 290 245
Accumulated depreciation -210 -175
Total PP&E 2225 1850
Total Assets 4738 4060

Current Liabilities
Line of Credit 20 120
Accounts payable 350 330
Prepaid revenue 440 420
Total current liabilities 810 870
Long-term Liabilities
LT Bank Loan 900 650
Shareholder Loan 400 400
Leases 120 150
Total LT liabilities 1420 1200
Shareholder Equity
Preferred shares 50 50
Common shares 100 50
Retained earnings 2358 1890
Total shareholder equity 2508 1990
Total Liabilities & Shareholder Equity 4738 4060

Scradley Incorporated
Cash Flow Statement
For the Year Ended December 31, 2019
(in $ thousands)
Operating
Non Cash Working Capital
Marketable securities 200
Accounts receivable -40
Inventory -45
Prepaid expenses 20
Line of Credit -100
Accounts payable 20
Prepaid revenue 20
Total NCWC 75
Amortization 125
Net Income 668
Total Operating 868
Investing
Land -350
Buildings -50
Furniture -55
Motor Vehicles -45
Equipment 0
Total Investing -500

Financing
LT Bank Loan 250
Shareholder Loan 0
Leases -30
Pref Shares 0
Common Shares 50
Dividends -200
Total Financing 70

Net Cash Flow 438

Opening Cash 180
Closing Cash 618

Tricksy Forecasts
Here are some of the common ways in which an Evil Instructor can try to complicate your task of forecasting proforma statements (i.e., how a Kindly Professor can help you get ready for messy real-world financial pictures). You will become a Master of Proformas when you know how to handle each of these situations:
• The business does not run on simple cash payments. There are accounts receivable and accounts payable.
• An operating expense item is not scaling in proportion to changes in sales or COGS. Instead, its proportion is itself changing (e.g., going from 10% of sales to 12% of sales). Additionally, the amount of this change might be stated in some obscure way.
• The levels of A/R and A/P are not stated as percentages of sales or COGS respectively. Instead they are stated in “days”. The same thing might happen with inventory.
• There are multiple products being sold, each with its own rules about A/R and A/P behaviours, and its own COGS. These can be separately tracked as distinct lines on the income statement.
• There is a purchase or sale of some capital asset.
• Taxes will not be a simple percentage of income. Instead, there will be some sliding scale or table of tax rates. This is very like the real-world situation.
• There are two changes happening simultaneously to the same line on a statement. For example, the base rate of an expense is scaling up (in proportion to increasing sales), but there is also a planned one-time special expenditure coming up. This is very common with marketing expenses.
• Annual depreciation amounts for the capital assets (i.e., PP&E) are not explicitly stated. Instead they have to be calculated. Option 1: by applying a depreciation rule to the original asset value (e.g., 10% per year). Option 2: by noticing the delta in “accumulated depreciation” between the two previous years.
• There is some short-term debt, which involves interest payments and the repayment of the principal in the upcoming year.
• The short-term debt is a line of credit that has a floating cap (based on some calculation of A/R and inventory).
• There is some long-term debt. This similarly involves interest expenses and principal repayment. But the repayment is now only “partial” each year. There will be a “current portion of LTD” of cash flowing out in the upcoming year, and a new portion of the LTD showing up as current, and a resulting decrease in the remaining LTD.
• There is an investment of new capital, either as new debt or as new equity.
• The forecast is not for a period exactly one year in the future. Instead it is for a shorter horizon, such as “next quarter”. This means that annual calculations will need to be adjusted (e.g., cut into quarters). Typically, this affects things like interest payments, depreciation amounts, how much LTD becomes current, etc.