Question

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.)

Answer 1

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.