Question

Problem 12-09
Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Cash	$   180,000		Accounts payable	$   360,000
Receivables	360,000		Notes payable	156,000
Inventories	720,000		Line of credit	0
Total current assets	$1,260,000		Accruals	180,000
Fixed assets	1,440,000		Total current liabilities	$   696,000
			Common stock	1,800,000
			Retained earnings	204,000
Total assets	$2,700,000		Total liabilities and equity	$2,700,000

Income Statement for December 31, 2016

Sales	$3,600,000
Operating costs	3,279,720
EBIT	$  320,280
Interest	18,280
Pre-tax earnings	$  302,000
Taxes (40%)	120,800
Net income	181,200
Dividends	$  108,000

Suppose that in 2017 sales increase by 15% over 2016 sales and that 2017 dividends will increase to $202,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (40%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Notes payable		$
Accruals		$
Total current liabilities		$
Common stock		$
Retained earnings		$
Total liabilities and equity		$

Answer 1

Pro Forma Income Statement
31-Dec-17
Sales		4140000.00
Operating costs		3771678.00
EBIT		368322.00
Interest		0.00
Pre-tax earnings		368322.00
Taxes (40%)		147328.80
Net income		220993.20
Dividends:		202000.00
Addition to RE:		18993.20

Garlington Technologies Inc.
Pro Forma Balance Statement
31-Dec-17
Cash	207000	Accounts payable	414000
Receivables	414000	Notes payable	156000
Inventories	828000	Line of credit	305006.8
Total current assets	1449000	Accruals	207000
Fixed assets	1656000	Total current liabilities	1082006.8
		Common stock	1800000
		Retained earnings	222993.2
Total assets	3105000	Total liabilities and equity	3105000

WORKINGS

1: There is no debt outstanding in the Balance sheet hence interest=0

2: Notes payable is not spontaneous, hence does not increase with increase in Sales.