Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has madea number ofassumptions, which are shown below:

1. Lamont has projected the firm's sales will be $1 million in the first year.
2. She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively.
3. For working capital, Lamont has estimated the following:

• Accounts receivable as a percentage of sales: 12%
• Inventory as a percentage of sales: 15%
• Accounts payable as a percentage of sales: 7%
• Accruals as a percentage of sales: 5%

1. A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate.
2. The firm's tax rate will be 30 percent.
3. Lamont will need to purchase $350,000 in plant and equipment.

Lamont will provide any other financing needed.

Question 1Based on Lamont's assumptionsprepare a pro forma income statement and balance sheet.

Question 2If her estimates are correct, what will be the firm's current ratio and debt ratio? Explain the meaning of these ratios.