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Pro forma statements. Provincial Imports Inc. has assembled past (2020) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year (2021). Only cells with blue fill color need to be updated (the remaining cells will update for you as you complete your work). Provincial Imports Inc. Income Statement for the Year Ended December 31, 2020 Sales Revenue $5,000,000 Less: Cost of goods sold 2,750,000 Gross profits $2,250,000 Less: Operating expenses 850,000 Operating profits $1,400,000 Less: Interest expense 200,000 Net profits before taxes $1,200,000 Less: Taxes (rate - 21%) 252,000 Net profits after taxes $948,000 Less: Cash dividends 288,000 To retained earnings $660,000 Assets Cash Marketable securities Accounts receivable Inventories Total current assets Net fixed assets Total assets Provincial Imports Inc. Balance Sheet December 31, 2020 Liabilities and stockholders' equity $200,000 Accounts payable 225,000 Taxes payable 625,000 Notes payable 500,000 Other current liabilities $1,550,000 Total current liabilities 1,400,000 Long-term debt $2,950,000 Total liabilities Common stock Retained earnings Total liabilities and equity $700,000 95,000 200,000 5,000 $1,000,000 500,000 $1,500,000 75,000 1,375,000 $2,950,000 Information related to financial projections for the year 2021 is as follows: (1) Projected sales are $6,000,000. (2) Cost of goods sold in 2020 includes $1,000,000 in fixed costs. (3) Operating expense in 2020 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. (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. (10) The tax rate will remain at 21%. a. Prepare a pro forma income statement for the year ended December 31, 2021, using the fixed cost data given to improve the accuracy of the percent-of-sales method. b. Prepare a pro forma balance sheet as of December 31, 2021, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account. Solution a. Prepare a pro forma income statement for the year ended December 31, 2021, using the fixed cost data given to improve the accuracy of the percent-of-sales method. $6,000,000 $6,000,000 Provincial Imports Inc. Pro Forma Income Statement for the Year Ended December 31, 2021 Sales Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate -21%) Net profits after taxes Less: Cash dividends To retained earnings $6,000,000 $200,000 $5,800,000 $5,800,000 $5,800,000 b. Prepare a pro forma balance sheet as of December 31, 2021, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account. $200,000 $6,000 Provincial Imports Inc. Pro Forma Balance Sheet as of December 31, 2021 Assets Liabilities and stockholders' equity Cash Accounts payable Marketable securities $225,000 Taxes payable Accounts receivable Notes payable Inventories Other current liabilities Total current assets $225,000 Total current liabilities Net fixed assets Long-term debt Total assets $225.000 Total liabilities Common stock Retained earnings External funds required Total liabilities and equity $206,000 $500,000 $706.000 $75,000 -$556,000 $225,000
