Question

Consider the following financial statements for Industrial Supply Company.

	(Actual)
	December 31,
Balance sheet	Year 1			Comments
Assets
Cash		$     400,000		20% increase (assumption)
Accounts receivable		2,000,000		20% increase (assumption)
Inventories		4,400,000		20% increase (assumption)
Total current assets		$  6,800,000
Fixed assets, net		$  1,200,000		20% increase (assumption)
Total assets (A)		$  8,000,000
Liabilities and Equity
Accounts payable (CL)		$  1,200,000		20% increase (assumption)
Notes payable		1,500,000
Total current liabilities		$  2,700,000
Long-term debt		500,000		No change (assumption)
Stockholders’ equity		4,800,000
Total liabilities and equity		$  8,000,000
Income Statement	Year 1
Sales (S)		$15,100,000		20% increase (forecasted)
Expenses, including interest & taxes		13,800,000
Earnings after taxes (EAT)		$ 1,300,000
Dividends paid (D)		250,000		No change (assumption)
Retained earnings		$    1,050,000
Selected Financial Ratios
Current ratio		2.52 times
Debt ratio		40.00%
Return on stockholders’ equity		27.08%
Net profit margin on sales		8.61%

Determine the amount of additional financing needed and pro forma financial statements (that is, balance sheet, income statement, and selected financial ratios) for Year 2 under the following conditions:

Increase in Sales	Increase in Expenses
$3,020,000	$2,760,000

Assume the following:

• The company plans to maintain its dividend payments and long-term debt at the same level in Year 2 as in Year 1.
• All of the additional financing needed is in the form of short-term notes payable.
• Levels of cash, accounts receivable, inventories, net fixed assets and accounts payable increase proportionately as sales increase.

Round your answers in dollar form to the nearest dollar. Round your answers for financial ratios to two decimal places.

Additional Financing Needed:     $

	(Actual)			(Pro forma)
	December 31,			December 31,
Balance sheet	Year 1			Year 2
Assets
Cash		$     400,000			$
Accounts receivable		2,000,000
Inventories		4,400,000
Total current assets		$  6,800,000			$
Fixed assets, net		$  1,200,000			$
Total assets (A)		$  8,000,000			$
Liabilities and Equity
Accounts payable (CL)		$  1,200,000			$
Notes payable		1,500,000
Total current liabilities		$  2,700,000			$
Long-term debt		500,000
Stockholders’ equity		4,800,000
Total liabilities and equity		$  8,000,000			$
Income Statement	Year 1			Year 2
Sales (S)		$15,100,000			$
Expenses, including interest & taxes		13,800,000
Earnings after taxes (EAT)		$ 1,300,000			$
Dividends paid (D)		250,000
Retained earnings		$   1,050,000			$
Selected Financial Ratios
Current ratio		2.52 times			times
Debt ratio		40.00%			%
Return on stockholders’ equity		27.08%			%
Net profit margin on sales		8.61%			%

Answer 1