Question

Financing Deficit Garlington Technologies Inc.'s 2018 financial statements are shown below: Balance Sheet as of December 31, 2018 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, 2018 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 2019 sales increase by 20% over 2018 sales and that 2019 dividends will increase to $202,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2018. Use an interest rate of 9%, 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. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2019 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, 2019 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

INCOME STATEMENT
	2018	Basis for forecast	Forecast 2019
Sales	$      36,00,000	+20%	$ 43,20,000
Less: Operating costs	$      32,79,720	91.1033% of sales	$ 39,35,664
EBIT	$         3,20,280		$    3,84,336
Less: Interest expenses	$            18,280	156000*9%	$        14,040
Pre-tax earnings	$         3,02,000		$    3,70,296
Less: Taxes [40%]	$         1,20,800		$    1,48,118
Net income	$         1,81,200		$    2,22,178
Dividend	$         1,08,000		$    2,02,000
Addition to retained earnings	$            73,200		$        20,178
BALANCE SHEET
	2018	Basis for forecast	Forecast 2019 [Before EFN]	Forecast 2019 [After EFN]
Assets
Cash	$         1,80,000	5% of sales	$    2,16,000	$      2,16,000
Receivables	$         3,60,000	10% of sales	$    4,32,000	$      4,32,000
Inventories	$         7,20,000	20% of sales	$    8,64,000	$      8,64,000
Total current assets	$ 12,60,000	35% of sales	$ 16,38,000	$    16,38,000
Fixed assets	$ 14,40,000	40% of sales	$ 17,28,000	$    17,28,000
Total assets	$ 27,00,000		$ 33,66,000	$    33,66,000
Total liabilities & Equity				$                    -
Current liabilities:				$                    -
Accounts payable	$         3,60,000	10% of sales	$    4,32,000	$      4,32,000
Notes payable	$         1,56,000		$    1,56,000	$      1,56,000
Line of credit	$                      -			$      5,37,822
Accruals	$         1,80,000	5% of sales	$    2,16,000	$      2,16,000
Total current liabilities	$         6,96,000		$    8,04,000	$    13,41,822
Long term debt	$                      -		$                 -	$                   -
Total liabilities	$         6,96,000		$    8,04,000	$    13,41,822
Stockholders' equity:
Common stock	$      18,00,000		$ 18,00,000	$    18,00,000
Retained earnings	$ 2,04,000	+20178	$    2,24,178	$      2,24,178
Stockholders' equity	$      20,04,000		$ 20,24,178	$    20,24,178
Total liabilities & stockholders' equity	$      27,00,000		$ 28,28,178	$    33,66,000
EFN			$    5,37,822