Question

In: Accounting

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to...

The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also will remain constant. Costs, other expenses, current assets and accounts payable increase spontaneously with sales.

SCOTT, INC.
2019 Income Statement
  Sales $763,000
  Costs 598,000
  Other expenses 34,000
  Earnings before interest and taxes $131,000
  Interest expense 30,000
  Taxable income $101,000
  Taxes (25%) 25,250
  Net income $75,750
Dividends $23,483
Addition to retained earnings 52,267
SCOTT, INC.
Balance Sheet as of December 31, 2019
Assets Liabilities and Owners’ Equity
  Current assets   Current liabilities
    Cash $ 22,240     Accounts payable $ 56,400
    Accounts receivable 45,180     Notes payable 15,600
    Inventory 107,960       Total $ 72,000
      Total $ 175,380   Long-term debt $ 146,000
  Fixed assets   Owners’ equity
    Net plant and equipment $ 439,000     Common stock and paid-in surplus $ 122,500
    Retained earnings 273,880
Total $ 396,380
Total assets $ 614,380 Total liabilities and owners’ equity $ 614,380

In 2019, the firm operated at 80 percent of capacity. Construct the pro forma income statement and balance sheet for the company. Assume that the company cannot sell fixed assets. This implies that asset utilization may remain less than 100 percent next year as well. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)



What is the EFN? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32. A negative answer should be indicated by a minus sign.)

Solutions

Expert Solution

1] Income Statement
Sales = 763000*120% = 915600
Costs = 598000*120% = 717600
Other expenses = 34000*120% = 40800
EBIT 157200
Interest 30000
Taxable income 127200
Taxes [25%] 31800
Net income 95400
Dividends [31%] 29574
Addition to retained earnings 65826
Proforma Balance Sheet
Assets Liabilities and Owners' Equity
Current assets: Current liabilities:
Cash [22240*120%] 26688 Accounts payable [56400*120%] 67680
Accounts receivable [45180*120%] 54216 Notes payable 15600
Inventory [107960*120%] 129552 Total current liabilities 83280
Total 210456 Long term debt 146000
Fixed assets: Owners' equity:
Net plant and equipment 439000 Common stock and paid in surplus 122500
[The firm is working at 80% capacity; 20% Retained earnings = 273880+65826 = 339706
increase will make it only 96%. Hence, no increase in FA required] Total 462206
Total assets 649456 Total liabilities and owner's equity 691486
2] EFN = 649456-691486 = -42030
As the EFN is negative, it indicates surplus cash.

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