Toy World

Topics: Balance sheet, Generally Accepted Accounting Principles, Debt Pages: 4 (990 words) Published: January 4, 2010
COMM 371, Lecture 7

COMM 371, Lecture 7

Lecture 7: Financing Seasonal Needs - Toy World, Inc. • Objectives: • To understand the pattern of current assets and cash flows in a company with seasonal sales, and how these are affected by the choice of production plan • To understand the trade-off between profitability versus risk and liquidity in choosing between level and seasonal production • To practice the mechanics of basic financial analysis What is it that we are trying to help Mr. McClintock with? Case Facts • Highly seasonal sales (80% of sales between August and November) • Current production follows sales, and thus is highly seasonal. • Question: should the company smooth production over the year? • Examine pro-forma monthly statement of cash flows for 1994, constructed with base on pro-forma tables reported by company



COMM 371, Lecture 7

COMM 371, Lecture 7

What we will do • Assess Toy World’s need for external financing under its current (seasonal) production plan. Discuss the timing, magnitude, and duration of borrowing needs, and risk. • Assess Toy World’s need for external financing under the proposed level production plan • Conceptual discussion • The mechanics of preparing the pro forma income statement and balance sheet • Would a bank be likely to provide the financing necessary under the smooth production plan? • Would you recommend adoption of the level production plan? • Cost savings versus risks

The Current (Seasonal) Production Plan Production is approximately equal to sales (production in response to customer orders). Cost and benefit of the seasonal production plan: • Inventory • Inventory is minimized and the funds necessary to finance inventory is minimized. • Inventory risk is minimized. • Costs • Overtime premiums in high season (reduces profits) • Difficulty in scheduling production runs & shorter production runs • Fixed capital is underused part of the year and then run to capacity • Seasonal financing...
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