Project - Phase 1 - To Do
FNCE 390 - Project - Phase 1
GREENGO LTD.
Formation of Business
I Introduction
For several years now you have been working with three "boot-strap" business operations involved in
the manufacture of agricultural crop nutrients. As a "hopeful my big day" business investor you have recently joined
a boutique venture capital firm. You believe your time has come and have convinced the venture firm
partners that there is unlimited potential if these three businesses are combined (your fellow school mates).
You have also convinced your school mates that there are many potential benefits by combining the three operations
and gaining access to your firms venture capital funding. Believing you, they have asked you to "make it happen "
and complete the combination. Your documented project plan and implementation steps are outlined below:
The business's will combine effective Fe
uary 1, 2022 into a single incorporated entity. You will create a
Fe
uary 1, 2022 Opening Balance sheet reflecting the closing of the business combination transaction.
The businesses will then transition operations from "as is" to an integrated entity over the next year.
You will develop the forecast income statement for the first year of operations using the assumptions provided for the
year ended January 31, 2023 as well as the January 31, 2023 Balance Sheet. You are doing this as you
believe it will take one year to establish operations before heading down the growth plan you have in mind. Financial
performance for the first year is based on 2022 combined results of the individual businesses with certain adjustments
you expect to see from the formation of the new company.
II Project Plan
A Combination process - Entries for Column H
1 Complete the column "Combined As Is" Balance Sheet by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
2 Complete the column "Combined As Is" Income Statement by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
3 Review the "Combined As Is" Ratios (each entity has formulas to work with)
Test check accuracy of ratios in Column H
B Incorporation process - revaluation adjustments reflect in Column J - new Balance column K
1 The incorporation process has been structured such that an incorporated entity created by your firm will acquire
the operations of each entity. As such all assets are revalued to their fair market values at the time of
acquisition. The fair market values are:
Cash All cash balances of original operations paid to founders - Combined cash = $0
Opening Balance Sheet cash = $0
Accounts receivable Accounts receivable are revalued at 7% higheras no allowance for doubtfuls
Inventory Inventory is revalued at 9% lower due to obsolete raw materials
Prepaid expenses Transfer $105,000 to Inventory as goods received day of transaction.
Defe
ed revenue Reduce by 20% to reflect work completed - record change to venture capital
short term loan as is considered a purchase adjustment
Land combined revised market value per appraisal 2,010,000
Building combined revised market value of 2,450,000
Equipment increase combined market value to 975,000
Vehicles revised market value 380,000
Accumulated depreciation Adjusted all historical balances to a zero balance as assets are revalued
and reflect a new starting value
Goodwill and intangibles Add $330,000 for goodwill
Accounts payable Due diligence discovered an additional $280,000 in payables
Income taxes payable Nones
Defe
ed tax liability Add $415,000 for tax effect of transaction as defe
ed tax liability
Term loan No change
Mortgage No change
Cu
ent portion of debt No change
Due to relatives Convert 20% of balance to share capital - repay 80% using venture capital
short term loan
Proprietorship capital Convert full balances to share capital
Partnership capital Convert full balances to share capital
Share capital Proprietor + Partnership capital + 30% of due from relatives converted
Retained Earnings None as the start-up of new legal entity
Venture capital loan Balancing figure of all other balance sheet balances and adjustments
C XXXXXXXXXXOperations - Operational Changes - reflect in XXXXXXXXXXadjustments column (Column P)
1 Revenues will increase by $7,200,000
2 Gross profit will be 29% based on XXXXXXXXXXpro forma ending revenues
3 Selling costs will increase by 11% of incremental sales
4 Administrating costs will increase by 8% of incremental cost of sales
5 Amortization will increase by $180,000 per annum (in addition to historical)
6 Interest expense will increase based on venture capital short term loan balance at 9% interest rate
7 Income taxes will be 24% of combined incomes as now an incorporated entity - split as
follows - 25% defe
ed - 75% cu
ent - adjust balance sheet accounts for these amounts
8 Adjust final accounts receivable balances to reflect a 45 day collection cycle - difference to cash (use 360 days)
9 Adjust final inventory balances to reflect 57 days on hand - difference to cash (use 360 days)
10 Adjust final accounts payable balances to reflect a turnover ratio of 72 days - difference to cash (use 360 days)
11 Acquired new formulation equipment for $154,000 and financed 100% with a new term loan at end of year.
Term loan is repayable over five years and life of equipment will be 10 years.
D Balance Sheet Steps - balancing everything
1 Columns B through to L will balance at the Balance Sheet level - ignore income statement effects.
2 Columns N & P must reflect the income statement changes and will balance by recording the balance amount in cash
If you leave cash blank - the figure reflected in line 57 * -1 should work. Once cash adjusted - line 57 = 0
3 Column R will balance if 1 and 2 above are balanced
E Your Management Report
Upon completion you are to prepare a
ief report and include as an Appendix your completed Template
Your report should address the following:
1) describe 3 benefits of incorporation into a larger entity
2) 3 areas of financial improvement you want to address going forward based on ratio analysis
3) identify 3 potential conflicts that could arise between management and your venture capital
firm
4) considering your growth plans - what senior management positions would you conside
necessary to ensure credibility in the financial community? Maximun size is 6 members.
5) Build the Year 1 cash flow statement to support the change in cash for Year 1
statement section and add as Appendix
6) Should dividends be considered at this time.
Maximum Report length is 2 pages plus Appendices
F Project Responsibility
As you develop the project you are required to report to the Venture Capital Senior Manager to ensure work
is progressing co
ectly. You are encouraged to ask for assistance at any time - email with questions
and proposed solutions. DO NOT LEAVE THIS TO LAST MOMENT. Good practice for mid-term preparation.
Each column must balance at the balance sheet level. Working on a column by column basis will
be most effective with the respective columns cross adding.
If a formula exists in a cell - do not alter it. If unsure of what to do - contact the Senior Manager.
The cells with require work by you.
GREENGO Template
GREENGO LTD. Owner: XXXXXXXXXXMary Oilseed Partners: Helen Lamb (75%) + Heather Legg (25%) Shareholder: XXXXXXXXXXNicolas Gold Balance Sheet Opening As Is = Combined + Corporate Tax Effect Operational Changes Including Corporate Tax Forecast Results
Start-up Balance Sheets Canola Grow XXXXXXXXXXproprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined Revaluation GREENGO LTD. First Year XXXXXXXXXXFeb XXXXXXXXXXJan XXXXXXXXXX Adjustments GREENGO LTD.
January XXXXXXXXXX Fe
uary 1 Fe
uary 1
2022 2022 2021 As Is Adjustments Opening Operations XXXXXXXXXX Jan XXXXXXXXXX
Assets
Cu
ent assets
Cash $ 65,000 $ 75,000 $ 35,000 $ - 0 $ - 0 Balancing Figure
Accounts receivable 1,375,000 1,200,000 1,080,000 - 0 - 0
Inventory 1,115,000 1,350,000 900,000 - 0 - 0
Prepaid expenses 55,000 105,000 60,000 - 0 - 0
2,610,000 2,730,000 2,075,000 - 0 - 0 - 0 - 0 - 0 - 0
Property, plant and equipment
Land 610,000 500,000 525,000 - 0 - 0
Buildings 250,000 700,000 600,000 - 0 - 0
Equipment 160,000 550,000 130,000 - 0 - 0
Vehicles 80,000 200,000 90,000 - 0 - 0
1,100,000 1,950,000 1,345,000 - 0 - 0 - 0 - 0 - 0 - 0
Less: Accumulated amortization
Accumulated amortization - Buildings - 0 (150,000) (200,000) - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Accumulated amortization - Equipment (40,000) (85,000) (80,000) - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Accumulated amortization - Vehicles (80,000) (100,000) (80,000) - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
(120,000) (335,000) (360,000) - 0 - 0 - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
980,000 1,615,000 985,000 - 0 - 0 - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Goodwill and other intangibles - 0 - 0 - 0 - 0 - 0 - 0
$ 3,590,000 $ 4,345,000 $ 3,060,000 $ - 0 $ - 0 $ - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Liabilities and Shareholders' Equity
Cu
ent liabilities
Accounts payable $ 2,090,000 $ 1,515,000 $ 1,909,900 $ - 0 $ - 0
Defe
ed revenue 125,000 130,000 210,000 - 0 - 0
Income taxes payable - 0 - 0 - 0 - 0 - 0 - 0 - 0
Venture short term loan - due on demand - 0 - 0 - 0 - 0 - 0 - 0
Cu
ent portion of long term debt 100,000 45,000 50,000 - 0 - 0 - 0
2,315,000 1,690,000 2,169,900 - 0 - 0 - 0 - 0 - 0 - 0
-
Term loan payable 400,000 400,000 - 0 - 0 - 0
Refinance term loan - 0 - 0 - 0 - 0 - 0
Mortgage payable - 0 650,000 500,000 - 0 - 0
Due to Relatives 300,000 1,000,000 440,000 - 0 - 0
700,000 2,050,000 940,000 - 0 - 0 - 0 - 0 - 0 - 0
Less: portion due within one year (100,000) (45,000) (50,000) - - 0 - - -
600,000 2,005,000 890,000 - 0 - 0 - 0 - 0 - 0 - 0
Defe
ed income taxes - 0 - 0 - 0 - 0 - 0 - 0 - 0
2,915,000 3,695,000 3,059,900 - 0 - 0 - 0 - 0 - 0 - 0
Shareholders' Equity
Proprietorship Capital 675,000 - 0 - 0 - 0 - 0
Partnership Capital - 0 650,000 - 0 - 0 - 0
Share capital - 0 - 0 100 - 0 - 0
Retained earnings - 0 - 0 - 0 - 0 - 0 - 0 - 0
675,000 650,000 100 - 0 - 0 - 0 - 0 - 0 - 0
3,590,000 4,345,000 3,060,000 - 0 - 0 - 0 - 0 - 0 - 0
- 0 - 0 - 0 - 0 - 0 - 0 ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
GREENGO LTD. AS IS
Income Statement Canola Grow XXXXXXXXXXproprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined First Year Operating Adjustments GREENGO LTD.
Year Ended January 31 2022 2022 2022 As Is Operations XXXXXXXXXX Jan XXXXXXXXXX
Revenues $ 7,750,000 $ 14,560,000 $ 7,450,000 $ - 0 $ - 0
Cost of goods sold 5,618,750 10,192,000 5,587,500 - 0
Gross profit 2,131,250 4,368,000 1,862,500 - 0 - - - 0
27.5% 30.0% 25.0% ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0!
Expenses
Selling 685,000 2,680,000 995,000 - 0 - 0
Administrative 815,000 877,000 675,000 - - 0
Amortization 60,000 125,000 70,000 - 0
Interest 4,750 25,000 97,500 - 0 - 0
1,564,750 3,707,000 1,837,500 - 0 - 0 - 0 - 0
Income before income taxes 566,500 661,000 25,000 - 0 - 0 - 0 - 0
Income tax expense
- cu
ent - 0 - 0 - 0
- defe
ed - 0 - 0 - 0
Income tax expense - 0 - 0 - 0 - 0 - 0 - 0 - 0
Net income $ - 0 $ - 0 $ 25,000 $ - 0 $ - 0 $ - 0 $ - 0
Retained earnings, beginning - 0 - 0 (25,000) - 0 - 0 - 0
Less: Dividends - 0 - 0 - 0 - 0 - 0 - 0
Retained earnings, ending $ - 0 $