Question

You are preparing to discuss borrowing needs with your bank's loan officer who asks you to prepare pro-forma financial statements. Below are the financial statements for the year just ended. Your sales department is projecting a 40% increase in sales. Days sales outstanding are expected to improve to 90. With respect to inventory and accounts payable, assume that purchases will be $9,200,000 and cash payments will be $9,000,000. Operations are running at 75% of capacity and have recently been streamlined. Accordingly, gross profit margins are expected to be 11% in the future. Other expenses are expected to remain the same percentage of sales. The retention ratio is 45%. For ease of calculation, assume interest expense remains the same. Prepare pro-forma financial statements and determine the amount of borrowing needs, which will be reflected in long-term debt.

Cash	200,000		Sales	7,500,000
Accts receivable	2,500,000		Cost of sales	6,750,000
Inventory	1.800,000		Gross profit	750,000
Total current assets	4,500,000		Other expenses	250,000
Fixed assets	400,000		EBIT	500,000
Total assets	4,900,000		Interest	100,000
			EBT	400,000
Accounts Payable	1,200,000		Taxes (40%)	160,000
Long-term debt	700,000		Net income	240,000
Total debt	1,900,000
Common stock	2,300,000
Retained Earnings	700,000
Total debt & equity	4,900,000

Answer 1

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Proforma Income Statement:
Sales	7500000+40%		$       10,500,000
Less: Cost of Sales	100-11=89%		$          9,345,000
Gross Margin			$          1,155,000
Less: Other Expenses	250000/7500000*10500000		$             350,000
EBIT			$             805,000
Interest	Same		$             100,000
EBT			$             705,000
Tax 40%			$             282,000
Net Income			$             423,000
Retention ratio is 45%, hence Dividen Payout is 55%			$             232,650
Proforma Balance sheet:
Working:
Inventory:
Beginning Inventory	$                                                 1,800,000
Add: Purchase	$                                                 9,200,000
Less: Cost of Sales	$                                                 9,345,000
Ending Inventory	$                                                 1,655,000
Accounts Receivable:
Days Sales Outstanding	90 Days
Days Sales Outstanding	Accounts Receivable/Credit Sale*360
90	Acounts Receivable/10500000*360
Accounts Receivable	90*10500000/360
Accounts Receivable	2625000
Retained Earning:
Beginning	$                                                     700,000
Add: Net Income	$                                                     423,000
Less: Dividend	$                                                     232,650
Ending Balance	$                                                     890,350
Cash:
Beginning Balance	$                                                     200,000
Add: Collection from Customers	$                                               10,375,000
(2500000+10500000-2625000)
Total Cash Available	$                                               10,575,000
Less: Cash Payment for:
Purchases	$                                                 9,000,000
Other Expense	$                                                     350,000
Interest	$                                                     100,000
Income Tax	$                                                     282,000
Dividend	$                                                     232,650
Ending Cash Balance	$                                                     610,350
Accounts Payable:
Beginning	$                                                 1,200,000
Add: Purchase	$                                                 9,200,000
Less: Payment	$                                                 9,000,000
Ending Balance	$                                                 1,400,000
Proforma Balance Sheet:
Cash	$                                                     610,350
Accts receivable	$                                                 2,625,000
Inventory	$                                                 1,655,000
Total current assets	$                                                 4,890,350
Fixed assets	$                                                     400,000
Total assets	$                                                 5,290,350
Accounts Payable	$                                                 1,400,000
Long-term debt	$                                                     700,000
Total debt	$                                                 2,100,000
Common stock	$                                                 2,300,000
Retained Earnings	$                                                     890,350
Total debt & equity	$                                                 5,290,350