Question

Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

Red Queen Restaurants Income Statement for the Year Ended December 31, 2019  
Sales revenue    $799,000
Less: Cost of goods sold   599,000
Gross profits    $200,000
Less: Operating expenses   101,000
Net profits before taxes    $99,000
Less: Taxes (21%)   20,790
Net profits after taxes    $78,210
Less: Cash dividends   20,500
To retained earnings    $57,710

      Red Queen Restaurants Balance Sheet December​ 31, 2019        
Assets Liabilities and Stockholders' Equity  
Cash    $32,700 Accounts payable    $99,900
Marketable securities    17,800       Taxes payable    20,600
Accounts receivable    149,800       Other current liabilities   4,500
Inventories   100,400 Total current liabilities   $125,000
Total current assets    $300,700       Long-term debt    $199,700
Net fixed assets   349,500 Common stock   $150,500
Retained earnings   $175,000
Total assets   $650,200 Total liabilities and equity    $650,200

The following financial data are also​ available:

(1) The firm has estimated that its sales for 2020 will be $899,700.

​(2) The firm expects to pay $34,400 in cash dividends in 2020.

​(3) The firm wishes to maintain a minimum cash balance of $31,500.

​(4) Accounts receivable represent approximately 21% of annual sales.

​(5) The​ firm's ending inventory will change directly with changes in sales 2020.

​(6) A new machine costing $43,100will be purchased in 2020.Total depreciation for 2020 will be $15,800.

​(7) Accounts payable will change directly in response to changes in sales in 2020.

​(8) Taxes payable will equal​ one-fourth of the tax liability on the pro forma income statement.

​(9) Marketable​ securities, other current​ liabilities, long-term​ debt, and common stock will remain unchanged.

Questions:

a. Prepare a pro forma income statement for the year ended December​ 31, 2020​, using the ​percent-of-sales method.

b. Prepare a pro forma balance sheet dated December​ 31, 2020​, using the judgmental approach.

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

Answer 1

Income Statement for the Year Ended December 31, 2019 and December​ 31, 2020
Particulars	Information	Basis	31/12/2019	31/12/2020
Sales revenue	-	1	799,000	899,700
Less: Cost of goods sold	Remain Same	-	599,000	674775
Gross profits			200,000	224,925
Less: Operating expenses	Depreciation Added		101,000	116800
Net profits before taxes	-	-	99,000	108,125
Less: Taxes (21%)	-	-	20,790	22706
Net profits after taxes	-	-	78,210	85,419
Less: Cash dividends	-	2	20,500	34,400
Total retained earnings	-	-	57,710	51,019
Pro forma balance sheet dated December​ 31, 2019​, and December​ 31, 2020
Assets	Information	Basis	31/12/2019	31/12/2020
Cash	-	3	32,700	31,500
Marketable securities	-		17,800	17,800
Accounts receivable	21% Sales	4	149,800	188937
Inventories	Change as per Sales( 12.60%)	5	100,400	113054
Net fixed assets	See below Working	6	349,500	301,991
Total Assets	-		650,200	653,281
Liabilities and Stockholders' Equity	Information	Basis	31/12/2019	31/12/2020
Accounts payable	Change as per Sales	7	99,900	112491
Taxes payable	-	-	20,600	11090
Other current liabilities	-	-	4,500	4,500
Long-term debt	-	-	199,700	199,700
Common stock	-	-	150,500	150,500
Retained earnings	-	-	175,000	175,000
Total liabilities and equity			650,200	653281

No External Financing Required in this case because the Cash And Retained Earning is also available for to meet the financial requirement.