P422 Integrative: Pro forma statements Provincial Imports Inc. has assembled last years financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year.

Provincial Imports Inc. Income Statement for the Year Just Ended

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

Provincial Imports Inc. Balance Sheet for the Year Just Ended

Assets Liabilities and stockholders equity Cash $ 200,000 Accounts payable $ 700,000 Marketable securities 225,000 Taxes payable 95,000 Accounts receivable 625,000 Notes payable 200,000 Inventories 500,000 Other current liabilities 5,000 Total current assets $1,550,000 Total current liabilities $1,000,000 Net fixed assets 1,400,000 Long-term debt 500,000 Total assets $2,950,000 Total liabilities $1,500,000 Common stock 75,000 Retained earnings 1,375,000 Total liabilities and equity $2,950,000

Information related to financial projections for next year is as follows:

1. Projected sales are $6,000,000.

2. Cost of goods sold last year includes $1,000,000 in fixed costs.

3. Operating expense last year 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% and taxes payable are 38% of the tax liability on the income statement.

    1. Prepare a pro forma income statement for next year using the fixed cost data given to improve the accuracy of the percent-of-sales method.

    2. Prepare a pro forma balance sheet for next year using the information given and the judgmental approach. Include a reconciliation of the retained earnings account.

    3. Analyze these statements, and discuss the resulting external financing required.