Question

Financing Deficit Garlington Technologies Inc.'s

2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Cash $ 180,000

Accounts payable $ 360,000

Receivables 360,000

Notes payable 156,000

Inventories 720,000

Line of credit 0

Total current assets $1,260,000

Accruals 180,000

Fixed assets 1,440,000

Total current liabilities $ 696,000

Common stock 1,800,000

Retained earnings 204,000

Total assets $2,700,000

Total liabilities and equity $2,700,000

Income Statement for December 31, 2016

Sales $3,600,000

Operating costs 3,279,720

EBIT $ 320,280

Interest 18,280

Pre-tax earnings $ 302,000

Taxes (40%) 120,800

Net income 181,200

Dividends $ 108,000

Suppose that in 2017 sales increase by 15% over 2016 sales and that 2017 dividends will increase to $140,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 9%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Garlington Technologies Inc.

Pro Forma Income Statement December 31, 2017

Sales $

Operating costs $

EBIT $

Interest $

Pre-tax earnings $

Taxes (40%) $

Net income $

Dividends: $

Addition to RE: $

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017

Cash $

Receivables $

Inventories $

Total current assets $

Fixed assets $

Total assets $

Accounts payable $

Notes payable $

Accruals $

Total current liabilities $

Common stock $

Retained earnings $

Total liabilities and equity $

Answer 1

Income Statement
	2016	2017 (F)
Sales	36,00,000	41,40,000
Operating costs	32,79,720	37,71,678
EBIT	3,20,280	3,68,322
Interest	18,280	14,040
Pre-tax earnings	3,02,000	3,54,282
Taxes (40%)	1,20,800	1,41,713
Net income	1,81,200	2,12,569
Dividends	1,08,000	1,40,000
Net carried to Retained Earnings	73,200	72,569

Balance Sheet as at
	31-Dec-16	31-12-2017 (F)		31-Dec-16	31-12-2017 (F)
Cash	1,80,000	1,80,000	Accounts payable	3,60,000	4,14,000
Receivables	3,60,000	4,14,000	Notes payable	1,56,000	1,56,000
Inventories	7,20,000	8,28,000	Line of credit	-	8,431
			Accruals	1,80,000	2,07,000
Total current assets	12,60,000	14,22,000	Total current liabilities	6,96,000	7,85,431
Fixed assets	14,40,000	14,40,000	Common stock	18,00,000	18,00,000
			Retained earnings	2,04,000	2,76,569
	27,00,000	28,62,000		27,00,000	28,62,000

Assumptin :

1. No capex.

2. All WC balances will be in proportion to sales

3. No change in cash balances.

4. Any change has been captured in line of credit.