Preparing Martin Manufacturing's 2013 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 2013. 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 firm's 2013 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2012 financial statements (1), along with the key projected financial data summarized in the following table (2).

Financial Statement (1)

Table (2)

To Do

a. Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2013. (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 (2)

b. 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, 2013. (Hint: Use the judgmental approach.)

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

Based on the pro forma financial statements prepared above, Martin Manufacturing will need to raise about $_________ ($_________) in external financing in order to undertake its construction program.

_____________________________

Can you please fill out the empty boxes and explain how you calculate it?

$5,075,000 3,704,000 $1,371,000 Martin Manufacturing Company Income Statement for the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense $650,000 General and administrative expenses 416,000 Depreciation expense 152.000 Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders Earnings per share (EPS) 1,218,000 $153,000 93,000 $60,000 24,000 $36,000 3,000 $33,000 $0.33 Martin Manufacturing Company Balance Sheets December 31, 2012 Assets Current assets Cash $25,000 Accounts receivable 805,556 Inventories 700,625 Total current assets $1,531,181 Gross fixed assets (at cost) $2,093,819 Less: Accumulated depreciation 500,000 Net fixed assets $1,593,819 Total assets $3,125,000 Liabilities and Stockholders' Equity Current liabilities Accounts payable $230,000 Notes payable 311,000 Accruals 75,000 Total current liabilities $616,000 Long-term debt $1,165,250 Total liabilities $1,781,250 Stockholders' equity Preferred stock (2,500 shares, $1.20 dividend) $50,000 Common stock (100,000 shares at $4.00 par)* 400,000 Paid-in capital in excess of par value 593,750 Retained earnings 300,000 Total stockholders' equity $1,343,750 Total liabilities and stockholders' equity $3,125,000 *The firm's 100,000 outstanding shares of common stock closed 2012 at a price of $11.38 per share. Martin Manufacturing Company Key Projected Financial Data (2013) Data item Value Sales revenue $6,500,000 Minimum cash balance $25,000 Inventory turnover (times) 7.0 Average collection period 50 days Fixed-asset purchases $400,000 Total dividend payments (preferred and common) $20,000 Depreciation expense $185,000 Interest expense $97,000 Accounts payable increase 20% Accruals and long-term debt Unchanged Notes payable, preferred and common stock Unchanged Complete the pro forma income statement for the year ended December 31, 2013 below: (Round the dollar amounts to the nearest dollar. Round the percentages of sale to four decimal places. NOTE: Make sure you use the rounded amounts to performed the proceeding calculations.) Martin Manufacturing Company Pro Forma Income Statement for the Year Ended December 31, 2013 Sales revenue $ 100.0 % Less: Cost of goods sold Gross profits $ Less: Operating expenses Selling expense and general and administrative expense $ % Depreciation expense Total operating expenses $ Operating profits $ Less: Interest expense Net profits before taxes $ Less: Taxes (40%) Total profits after taxes $ b. Complete the assets section of the pro forma balance sheet at December 31, 2013 below: (Round the to the nearest dollar.) Martin Manufacturing Company Pro Forma Balance Sheet December 31, 2013 Assets Current assets Cash $ Accounts receivable Inventories Total current assets $ Gross fixed assets Less: Accumulated depreciation Net fixed assets $ Total assets $ Complete the liabilities and stockholders' equity section of the pro forma balance sheet at December 31, 2013 below: (Round the to the nearest dollar.) Martin Manufacturing Company Pro Forma Balance Sheet (Cont'd) December 31, 2013 Liabilities and stockholders' equity Current liabilities $ Accounts payable Notes payable Accruals Total current liabilities Long-term debts Total liabilities $ Stockholders' equity Preferred stock $ Common stock (at par) lirimni ini Paid-in capital in excess of par Retained earnings Total stockholders' equity External funds required Total liabilities and stockholders' equity $