A prepare a pro forma income statement for the year

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Unformatted text preview: orma balance sheet dated December 31, 2004, using the judgmental approach. CHAPTER 3 139 Cash Flow and Financial Planning c. Analyze these statements, and discuss the resulting external financing required. LG5 3–19 Integrative—Pro forma statements Provincial Imports, Inc., has assembled statements and information to prepare financial plans for the coming year. Provincial Imports, Inc. Income Statement for the Year Ended December 31, 2003 Sales revenue $5,000,000 Less: Cost of goods sold Gross profits 2,750,000 $2,250,000 Less: Operating expenses Operating profits 850,000 $1,400,000 200,000 Less: Interest expense Net profits before taxes Less: Taxes (rate $1,200,000 40%) Net profits after taxes 480,000 $ 720,000 Less: Cash dividends 288,000 To retained earnings $ 432,000 Provincial Imports, Inc. Balance Sheet December 31, 2003 Assets Cash Liabilities and Stockholders’ Equity $ 200,000 Accounts payable $ 700,000 Marketable securities 275,000 Taxes payable 95,000 Accounts receivable 625,000 Notes payable 200,000 Inventories 500,000 Other current liabilities Total current assets $1,600,000 Total current liabilities 5,000 $1,000,000 Net fixed assets $1,400,000 Long-term debt $ 500,000 Total assets $3,000,000 Common stock $ Retained earnings $1,375,000 Total liabilities and equity $3,000,000 75,000 Information related to financial projections for the year 2004: (1) Projected sales are $6,000,000. (2) Cost of goods sold includes $1,000,000 in fixed costs. (3) Operating expense includes $250,000 in fixed costs. (4) Interest expense will remain unchanged. (5) The firm will pay cash dividends amounting to 40% of net profits after taxes. (6) Cash and inventories will double. (7) Marketable securities, notes payable, long-term debt, and common stock will remain unchanged. 140 PART 1 Introduction to Managerial Finance (8) Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales. (9) A new computer system costing $356,000 will be purchased during the year. Total depreciation expense for the year will be $110,000. a. Prepare a pro forma income statement for the year ended December 31, 2004, using the information given and the percent-of-sales method. b. Prepare a pro forma balance sheet as of December 31, 2004, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account. c. Analyze these statements, and discuss the resulting external financing required. CHAPTER 3 CASE Preparing Martin Manufacturing’s 2004 Pro Forma Financial Statements T o improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 2004. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firm’s 2004 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2003 financial statements presented on pages 92 and 93, along with the key projected financial data summarized in the following table. Martin Manufacturing Company Key Projected Financial Data (2004) Data item Value Sales revenue Minimum cash balance Inventory turnover (times) Average collection period Fixed-asset purchases Dividend payments Depreciation expense Interest expense Accounts payable increase $6,500,000 $25,000 7.0 50 days $400,000 $20,000 $185,000 $97,000 20% Accruals and long-term debt Unchanged Notes payable, preferred and common stock Unchanged Required a. Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2004. (Hint: Use CHAPTER 3 Cash Flow and Financial Planning 141 the percent-of-sales method to estimate all values except depreciation expense and interest expense, which have been estimated by management and included in the table.) b. Use the projected financial data along with relevant data from the pro forma income statement prepared in part a to prepare the pro forma balance sheet at December 31, 2004. (Hint: Use the judgmental approach.) c. Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain. WEB EXERCISE WW W Go to the Best Depreciation Calculator at the Fixed Asset Info. site, www. fixedassetinfo.com/defaultCalc.asp. Use this calculator to determine the straight-line, declining balance (using 200%), and MACRS depreciation schedules for the following items, using half-year averaging (the half-year convention). Item Date placed in service Cost Office furnishings 2/15/2002 $22,500 Laboratory equipment 5/27/2001 $14,375 9/5/2000 $45,863 Fleet vehicles Make a chart comparing the depreciation amounts that these three methods yield for the years 2002 to 2007. Discuss the implications of these differences. Remember to check the book’s Web site at www.aw.com/gitman for additional resources, including additional Web exercises. INTEGRATIVE CASE 1 Track Software...
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This document was uploaded on 01/19/2014.

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