Question
You are preparing to discuss borrowing needs with your bank's loan officer who asks you to prepare pro-forma financial statements. Below are the financial statements
You are preparing to discuss borrowing needs with your bank's loan officer who asks you to prepare pro-forma financial statements. Below are the financial statements for the year just ended. Your sales department is projecting a 25% increase in sales. Days sales outstanding are expected to improve to 90. With respect to inventory and accounts payable, assume that purchases will be $8,500,000 and cash payments will be $8,800,000. Operations are running at 75% of capacity and have recently been streamlined. Accordingly, gross profit margins are expected to be 11% in the future. Other expenses are expected to remain the same percentage of sales. The retention ratio is 40%. For ease of calculation, assume interest expense remains the same. Prepare pro-forma financial statements and determine the amount of borrowing needs, which will be reflected in long-term debt.
Cash | 200,000 | Sales | 7,500,000 | |
Accts receivable | 2,500,000 | Cost of sales | 6,750,000 | |
Inventory | 1,800,000 | Gross profit | 750,000 | |
Total current assets | 4,500,000 | Other expenses | 250,000 | |
Fixed assets | 400,000 | EBIT | 500,000 | |
Total assets | 4,900,000 | Interest | 100,000 | |
EBT | 400,000 | |||
Accounts Payable | 1,200,000 | Taxes (40%) | 160,000 | |
Long-term debt | 700,000 | Net income | 240,000 | |
Total debt | 1,900,000 | |||
Common stock | 2,300,000 | |||
Retained Earnings | 700,000 | |||
Total debt & equity | 4,900,000 |
Answer below:
Cash | 250,000 | Sales | 9,375,000 | |
Accts receivable | 2,311,644 | Cost of sales | 8,343,750 | |
Inventory | 1,956,250 | Gross profit | 1,031,250 | |
Total current assets | 4,517,894 | Other expenses | 312,500 | |
Fixed assets | 400,000 | EBIT | 718,750 | |
Total assets | 4,917,894 | Interest | 100,000 | |
EBT | 618,750 | |||
Accounts Payable | 900,000 | Taxes (40%) | 247,500 | |
Long-term debt | 869,394 | Net income | 371,250 | |
Total debt | 1,769,394 | |||
Common stock | 2,300,000 | |||
Retained Earnings | 848,500 | |||
Total debt & equity | 4,917,894 |
Full capacity sales = 7,500,000/.75 = 10,000,000; Projected Sales < 10,000,000 no new Fixed assets needed
Please explain process to getting to the answer.
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