Question

MMUNICATE ATC 14-1 Business Applications Case Preparing and using pro forma statements Maria Gutierrez and Devin Duzan recently graduated from the same university. After graduation th су decided not to seek jobs at established organizations but, rather, to start their own small business hop- ing they could have more flexibility in their personal lives for a few years. Maria's family has operated Mexican restaurants and taco trucks for the past two generations, and Maria noticed there were no taco truck services in the town where their university was located. To reduce the amount they would need for an initial investment, they decided to start a business operating a taco cart rather than a taco truck from which they would cook and serve traditional Mexican-styled street food They bought a used taco cart for $15,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $20,000 They took $5,000 from personal savings they had accumulated by working part time during college and they borrowed $15,000 from Maria's parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 4 percent. They will repay the principal over the next few years as cash becomes available. They were able to rent space in a parking lot near the campus they had attended, believing that the students would welcome their food as an alternative to the typical fast food that was currently available After two months in business, September and October, they had average monthly revenues of $20,000 and out-of-pocket costs of $16,000 for rent, ingredients, paper supplies, and so on, but not interest. Devin thinks they should repay some of the money they borrowed, but Maria thinks t should prepare a set of forecasted financial statements for their first year in business before decid ing whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results from their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the car will last at least five years, after which they expect to sell it for $5,000 and move on to somethi else in their lives. Maria agrees to prepare a forecasted (pro forma) income statement, balan sheet, and statement of cash flows for their first year in business, which includes the two mont already passed

Answer 1

a.

Projected income statement for Year 1
Particulars	Per Month	Per Annum
Revenue	$20,000	$240,000
Expense excluding interest	$16,000	$192,000
Contribution		$48,000
Less: Cart amortization		-$2,000
Less: Amortization of initial expenditure		-$1,000
Less: Interest per annum		-$600
Income per annum		$44,400

Projected cash flow statement for Year 1
Particulars	Per Month	Per Annum
Cash flow from operating activities		$48,000
Cash flow from investing activities		$0
Cash flow from financing activities:
Savings invested	$5,000
Loan from Devin	$15,000
Initial expenditure	-$5,000
Purchase of old cart	-$15,000
Interest on loan repaid	-$600
		-$600
Cash generated during the year		$47,400

Balance sheet at the end of year 1
Assets:	Amount	Amount
Preliminary expenses($5,000-$1,000)		$4,000
Cart value ($15,000-$2,000)		$13,000
Cash in hand		$47,400
		$64,400
Liabilities:	Amount	Amount
Capital invested		$5,000
Retained earnings		$44,400
Loan from Devin		$15,000
		$64,400

b.

The reasons include:

• The first thing is that there may be some unforeseen expenses that have not been accounted for.

• In the calculations, drawings are not taken into consideration, which will impact cash flow statements.

• Variation in sales during the off season has not been considered.

• Uncertainty is always associated with projection, which might lead to difference in calculations.