Question

Financing Deficit

Garlington Technologies Inc.'s 2019 financial statements are shown below:

Income Statement for December 31, 2019

Sales	$4,000,000
Operating costs	3,200,000
EBIT	$  800,000
Interest	120,000
Pre-tax earnings	$  680,000
Taxes (25%)	170,000
Net income	510,000
Dividends	$  190,000

Balance Sheet as of December 31, 2019

Cash	$   160,000		Accounts payable	$   360,000
Receivables	360,000		Line of credit	0
Inventories	720,000		Accruals	200,000
Total CA	$1,240,000		Total CL	$   560,000
Fixed assets	4,000,000		Long-term bonds	1,000,000
Total Assets	$5,240,000		Common stock	1,100,000
			RE	2,580,000
			Total L&E	$5,240,000

Suppose that in 2020 sales increase to $4.4 million and that 2020 dividends will increase to $110,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 9%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. 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, 2020
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (25%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2020
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Line of credit		$
Accruals		$
Total current liabilities		$
LT bonds		$
Common stock		$
Retained earnings		$
Total L&E		$

Answer 1

Answer:

1.) Proforma income statement Dec 31, 2020
Operating costs = 3,200,000 / 4,000,000 x 4,400,000 = $3,520,000
Interest = 1,000,000 x 9% = $90,000

Particulars	Amount ($)
Sales	4,400,000
Operating costs	(3,520,000)
EBIT	880,000
Interest	(90,000)
Pretax earnings	790,000
Taxes (25% x 790,000)	(197,500)
Net Income	592,500
Dividends	(110,000)
Addition to RE	482,500

2.) Proforma Balance sheet Dc 31, 2020

Assuming the Operating cost margin of sales is as the last year

Additional Finance needed (AFN) = (5240000/4000000 x 400000)-(560000/4000000 x 400000) - 482,500
=524,000-56,000-482,500
=-14500

Change in items of assets & liabilities except line of credit = 4400000-4000000 / 4000000 x 100
=10%

Particulars	Amount
Cash (160000*(1+10%))	176000
Receivables (360000*(1+10%))	396000
Inventories (720000*(1+10%))	792000
Total current assets	1364000
Fixed assets	4400000
Total Assets	5764000
Accounts payable (360000*(1+10%))	396000
Line of credit	-14500
Accruals (200000*(1+10%))	220000
Total current liabilities	601500
LT Bonds	1000000
Common Stock	1100000
Retained Earnings (2580000+482500)	3062500
Total liabilities & Stockhloders equities	5764000