information related to financial projections for next year is as follows: (1) projected sales are…

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. carry all calculations to two decimal places to reduce rounding error, especially in multi - step problems.

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. carry all calculations to two decimal places to reduce rounding error, especially in multi - step problems.

Answer

Explanation:

Step1: Calculate cost of goods sold (COGS) variable - part (assume variable COGS as a percentage of sales needs more data, for simplicity assume only fixed COGS for pro - forma for now)

Fixed COGS = $1,000,000

Step2: Calculate operating expenses variable - part (assume only fixed operating expenses for now)

Fixed operating expenses = $250,000

Step3: Calculate gross profit

Gross Profit = Projected Sales - Cost of Goods Sold Gross Profit = $6,000,000 - $1,000,000=$5,000,000

Step4: Calculate operating profit

Operating Profit = Gross Profit - Operating Expenses Operating Profit = $5,000,000 - $250,000 = $4,750,000

Step5: Calculate earnings before taxes (EBT)

Assume no other non - operating items for now, EBT=Operating Profit EBT = $4,750,000

Step6: Calculate taxes

Taxes = EBT×Tax Rate Taxes = $4,750,000×0.21 = $997,500

Step7: Calculate net profit after taxes (NPAT)

NPAT = EBT - Taxes NPAT = $4,750,000 - $997,500=$3,752,500

Step8: Calculate dividends

Dividends = 0.4×NPAT Dividends = 0.4×$3,752,500 = $1,501,000

Step9: Calculate retained earnings

Retained Earnings = NPAT - Dividends Retained Earnings = $3,752,500 - $1,501,000 = $2,251,500

Pro - forma income statement:

Item Amount ($)
Sales 6,000,000
Cost of Goods Sold 1,000,000
Gross Profit 5,000,000
Operating Expenses 250,000
Operating Profit 4,750,000
Taxes 997,500
Net Profit After Taxes 3,752,500
Dividends 1,501,000
Retained Earnings 2,251,500

For pro - forma balance sheet:

  1. Assets:
    • Cash and inventories: Assume initial values as $x$ and $y$ respectively, new values will be $2x$ and $2y$.
    • Marketable securities: Remains the same as previous year, say $m$.
    • Accounts Receivable: Assume it changes in proportion to sales. If previous accounts receivable is $AR_1$ and sales last year was $S_1$, new accounts receivable $AR_2=\frac{6,000,000}{S_1}×AR_1$.
    • New computer system: $356,000$ (net of depreciation, assume no accumulated depreciation yet for this new asset), total fixed assets (including other fixed assets with depreciation) will have a net value considering the $110,000$ total depreciation for the year.
  2. Liabilities and Equity:
    • Notes Payable: Remains the same as previous year, say $n$.
    • Accounts Payable: Changes in proportion to sales similar to accounts receivable.
    • Other current liabilities: Change in proportion to sales.
    • Long - term debt: Remains the same as previous year, say $l$.
    • Common stock: Remains the same as previous year, say $c$.
    • Retained Earnings: Calculated as above $2,251,500$.

External financing required (EFN) can be calculated as the difference between total assets and total liabilities and equity in the pro - forma balance sheet. If total assets are $TA$ and total liabilities and equity are $TLE$, EFN = $TA - TLE$.

Answer:

  1. Pro - forma income statement is shown above.
  2. Pro - forma balance sheet can be constructed as described above with assumptions for variable items based on sales changes and fixed items remaining the same.
  3. External financing required is the difference between total assets and total liabilities and equity in the pro - forma balance sheet. It indicates whether the firm needs additional funds from external sources such as debt or equity financing to meet its projected operations and asset growth.