1. (Marks: 20) The Longbranch Western Wear Company has the following financial statements, which are representative of the companys historical average.

Longbranch is expecting a 20 percent increase in sales next year, and management is concerned about the companys need for external funds. The increase in sales is expected to be carried out without any expansion of capital assets; instead, it will be done through more efficient asset utilization in the existing stores. The Dividends Payout Ratio remains unchanged and forecasted taxes are $24,400.

1. Using a percentofsales method, determine whether Longbranch Western Wear has external financing needs.
2. Prepare a pro forma income statement and balance sheet with any financing adjustment made to notes payable, i.e. including the external financing needs (the plug). If external financing is not required, excess funds are first used to reduce notes payable with the difference going towards reducing long-term debt.
3. Calculate the current ratio and total debt to assets ratio for each year.

\begin{tabular}{|c|c|} \hline \multicolumn{2}{|c|}{ Income Statement } \\ \hline & $200,000 \\ \hline & 158,000 \\ \hline Earnings before interest and taxes & 42,000 \\ \hline & 2,000 \\ \hline Earnings before taxes............ & 40,000 \\ \hline & 20,000 \\ \hline Earnings after taxes................ & $20,000 \\ \hline & $10,000 \\ \hline \end{tabular} Balance Sheet Assets Cash Accounts receivable Inventory Current assets Capital assets Liabilities and Shareholders' Equity Accounts payable. $5,000 $10,000 Accrued wages Accrued taxes Current liabilities. Notes payable. Long-term debt Common stock (at Par) Paid In Capital Retained earnings 1,000 2,000 8,000 7,000 15,000