Question

​(Pro

forma balance sheet

construction​)

Use the following​ industry-average ratios to construct a pro forma balance sheet for​ Karen's Beauty​ Products, Inc.:

Total asset turnover	1.5 times
Average collection period​ (assume 365-day​ year)	16 days
Fixed asset turnover	6 times
Inventory turnover​ (based on cost of goods​ sold)	2 times
Current ratio	1.9 times
Sales​ (all on​ credit)	​$5,000,000
Cost of goods sold	70​% of sales
Debt ratio	40​%

.

Fill in the assets section of the pro forma balance sheet.  ​(Round all items to the nearest​ dollar.)

Cash	​
Accounts receivable
Inventories
Net fixed assets
Total assets	​

Fill in the liabilities and common equity section of the pro forma balance sheet.  ​(Round all items to the nearest​ dollar.)

Current liabilities	​
​Long-term debt
Total liabilities	​
Common equity
Total liabilities and common equity	​

Answer 1

Answer : Balance Sheet :

Cash	530822	Current Liablities	1315789
Accounts receivable	219178	Long-term debt	17544
Inventories	1750000	Total Liability	1,333,333
Fixed assets	833,333	Retained earnings	2,000,000
Total assets	$3,333,333	Total liabilities and equity	3,333,333

Calculation :

1.) Fixed Asset = Sales / Fixed assets turnover

Fixed Asset = 5,000,000 / 6 ==> 833,333.33

2.) Accounts receivable = Days sales outstanding * Sales / 365

Accounts receivable = 16 * 5,000,000 / 365 ==> 219178.08

3.) . Cost of Goods Sold =Sales * 70%

Cost of Goods Sold = 5,000,000 * 70%

= 3,500,000

Inventory = Cost of goods sold / Inventory turnover ratio

Inventory = 3500000 / 2 ==> 1750000

4.)Total asset = Sales / Total asset tunover

= 5,000,000 / 1.5

= 3,333,333

5.)Cash = Total Asset - Fixed Asset - Inventory - Accounts receivable

Cash = 3,333,333 - 833,333 -1,750,000 - 219178 ==> 530822

6.)Total liabilities and equity = Total assets

So, Total liabilities and equity = 3,333,333

7.)Total Debt = Total assets * 40%

= 3,333,333 * 40% = 1,333,333

8.)Current Liablities = Current Asset / Current Ratio

Current Liablities = ( 219178.08 +1750000 + 530822) / 1.9

Current Liablities = 1315789

9.) Common Stock = Total liabilities and equity - Total Debt

Common Stock = ==> 3,333,333 - 1333,333 = 2,000,000