Analyze, Think, Communicate ATC 7-1 Business Applications Case Preparing and using pro forma statements Mary Helu and Jason Haynes rccently graduated from the same university Aftcr graduation thcy decidcd not to scck jobs at cstablishcd organizations but, rather, to start thcir own small busincss hoping they could have morc flexibility in their personal lives for a few ycars. Mary's family has operated Mexican restaurants and taco trucks for the past two gcncrations, and Mary noticcd thcre were no taco truck Scrviccs in the town where their university was locatcd. To reduce the amount they would nced for an initial investment, they dccided to start a business opcrating a taco cart rather than a taco truck, from which they would cook and scrve traditional Mexican-style strect food. They bought a used taco cart for $18,000. This cost, along with the cost for supplics to get startcd, a busincss liccnse, and street vendor licensc brought their initial cxpenditures to S22,000. They took $5,000 from personal savings they had accumulated by working part time during college, and they borrowcd $17,000 from Mary's parents. They agreed to pay interest on the outstanding loan balance cach month based on an annual rate of 5 percent. They will repay the principal over the next few years as cash becomes available. They were ablc to rent spacc in a parking lot ncar the campus they had attended, believing that the students would wclcome their food as an altcrnative to the typical fast food that was currently available. Page 344 After two months in business, September and October, they had average monthly revenues of $25,000 and out-of-pocket costs of S22,000 for rent, ingredicnts, paper supplics, and so on, but not interest Jason thinks they should repay some of the moncy they borrowed, but Mary thinks they should prepare a set of forccasted financial statements for their first ycar in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting coursc 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 cart will last at 1cast four ycars, after which they expcct to sell it for $6,000 and move on to something clse in their lives. Mary agrees to preparc a forccastcd (pro forma) income statement, balance sheet, and statement of cash flows for their first ycar in business, which includes the two months alrcady passed.