Chapter Case 4

Preparing Martin Manufacturings 20X3 Pro Forma Financial Statements

To 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 20X3. 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 firms 20X3 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 20X2 financial statements presented in the Chapter 3 case, along with the key projected financial data summarized in the following table.

Martin Manufacturing Company

Key Projected Financial Data for 20X3

Data Item Value

Sales Revenue $6,500,000

Minimum Cash Balance $25,000

Inventory Turnover (times) 7.0X

Average Collection Period 50 Days

Fixed Asset Purchases $400,000

Total Dividends (preferred & common) $20,000

Depreciation Expense $185,000

Interest Expense $97,000

Accounts Payable Increase 20%

Accruals, Long term debt, notes payable, preferred and common stock remain unchanged.

Ignore projecting income tax expense.

To Do:

Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 20X3. (Hint: Use 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.)

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, 20X3. (Hint: Use the judgmental approach.)

Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain.