Question

Financing Deficit

Stevens Textile Corporation's 2019 financial statements are shown below:

Balance Sheet as of December 31, 2019 (Thousands of Dollars)

Cash	$ 1,080		Accounts payable	$ 4,320
Receivables	6,480		Accruals	2,880
Inventories	9,000		Line of credit	0
Total current assets	$16,560		Notes payable	2,100
Net fixed assets	12,600		Total current liabilities	$ 9,300
			Mortgage bonds	3,500
			Common stock	3,500
			Retained earnings	12,860
Total assets	$29,160		Total liabilities and equity	$29,160

Income Statement for December 31, 2019 (Thousands of Dollars)

Sales	$36,000
Operating costs	34,000
Earnings before interest and taxes	$ 2,000
Interest	160
Pre-tax earnings	$ 1,840
Taxes (25%)	460
Net income	$ 1,380
Dividends (40%)	$    552
Addition to retained earnings	$ 828

Stevens grew rapidly in 2019 and financed the growth with notes payable and long-term bonds. Stevens expects sales to grow by 25% in the next year but will finance the growth with a line of credit, not notes payable or long-term bonds. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2020. The interest rate on all debt is 7%, and cash earns no interest income. The line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2019, that it cannot sell off any of its fixed assets, and that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the required line of credit. Do not round intermediate calculations. Round your answers to the nearest dollar.

Total assets: $ --------------

LOC: $ ---------------

Answer : Total assets : $ 36,450.

I need the LOC: $-----------------

Answer 1

Stevens
Income statement
	2019	2020 forecast basis	2020 Pro forma
Sales	36,000	25% increase	45,000
Operating costs	34,000	94.44% on sales	42,500
Earnings before interests and taxes	2,000		2,500
Interest	160	7% on all debts(notes payables + mortgage bonds)	392
Pre tax earnings	1,840		2,108
Taxes 25%	460		527
Net income	1,380		1,581
Dividends 40%	552		632
Addition to Retained Earnings	828		949

Stevens
Balance Sheet
Assets	Liabilities & Equity
	2019	2020 forecast	2020		2019	2020 forecast	2020
Cash	1,080	25% increase	1,350	Accounts payable	4,320	25% increase	5,400
Receivables	6,480	25% increase	8,100	Accruals	2,880	25% increase	3,600
Inventories	9,000	25% increase	11,250	Line of credit	0		4541 (balancing figure)
Total current assets	16,560		20,700	Notes payable	2,100		2100
Net fixed assets	12,600	25% increase	15,750	Total current liabilities	9,300		15,641
				Mortgage bonds	3,500		3,500
				Common stock	3,500		3,500
				Retained earnings	12,860	949	13,809
Total assets	29,160		36,450	Total liabilities and equity	29,160		36,450

Computation of LOC ( Without balancing the balance sheet and showing it as deficit)

Additional investments in assets = 36,450 - 29,160 = 7290

Additional Financing =[(5,400+3,600) - (4,320+2,880)]+ 949

=1,800 + 949 = 2,749

Financing Surplus (Deficit)= Additional Financing - Additional investments in assets

=2,749 - 7290 =-4541

LOC = 4541