Assume ABC Company has asked you to not only prepare their 2013 year-end Balance Sheet but to also provide pro-forma financial statements for the first quarter of 2014 (that is, January – March 2014). They also want you to evaluate 3 projects they are considering. Their information is as follows:End of the year information:Account12/31/13Ending BalanceCash160,000Accounts Receivable126,000Inventory75,200Equipment745,000Accumulated Depreciation292,460Accounts Payable36,900Short-term Notes Payable18,300Long-term Notes Payable157,225Common Stock450,000Retained EarningsSolve for thisAdditional Information:Sales for December total 12,000 units. Each monthâ€™s unit sales are expected to exceed the prior monthâ€™s results by 5%. The productâ€™s selling price is $15 per unit.Company policy calls for a given monthâ€™s ending inventory to equal 80% of the next monthâ€™s expected unit sales. The December 31, 2013 inventory is 9,400 units, which complies with the policy. The purchase price is $8 per unit.Sales representativesâ€™ commissions are 10.0% of sales and are paid in the month of the sales. The sales managerâ€™s monthly salary will be $3,500 in January and $4,000 per month thereafter.Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-termnote payable.The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of sale).All merchandise purchases are on credit, and no payables arise from any other transactions. One monthâ€™s purchases are fully paid in the next month.The minimum ending cash balance for all months is $160,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.Dividends of $100,000 are to be declared and paid in February.No cash payments for income taxes are to be made during the first calendar quarter. Income taxes will be assessed at 35% in the quarter.Equipment purchases of $55,000 are scheduled for March.ABC Companyâ€™s management is also considering 3 new projects consisting of the purchase of new equipment. The company has limited resources, and may not be able to complete all 3 purchases. The information for the purchases is as follows:Project 1Project 2Project 3Purchase Price$50,000$75,000$32,500Required Rate of Return12%8%10%Time Period3 years5 years2 yearsCash Flows â€“ Year 1$18,000$25,000$20,000Cash Flows â€“ Year 2$22,000$20,000$18,000Cash Flows â€“ Year 3$22,000$18,000N/ACash Flows â€“ Year 4N/A$16,500N/ACash Flows â€“ Year 5N/A$15,000N/ARequired Action:Part A:Prepare the year-end balance sheet for 2013. Be sure to use proper headings.Prepare budgets such that the pro-forma financial statements may be prepared.Sales budget, including budgeted sales for April.Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the March 31 budgeted inventory.Selling expense budget.General and administrative expense budget.Expected cash receipts from customers and the expected March 31 balance of accounts receivable.Expected cash payments for purchases and the expected March 31 balance of accounts payable.Cash budget.Budgeted income statement.Budgeted statement of retained earnings.Budgeted balance sheet.[Hint: The End-of-Chapter Challenge for Chapter 4 of the Textbook provides a template to guide you in the preparation of all the necessary budgets and financial statements.]Part B:Calculate using Excel formulas, the NPV of each of the 3 projects.It is possible that ABC Company may not be able to complete all 3 projects. Therefore, advise ABC Company as to the order in which they should pursue the projects (i.e., which project should ABC Company attempt to do first, second, and last).Provide justification and analysis as to why you chose the order you did. The analysis must also be done in Excel, not in a separate document.
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