Question

FORECASTING FINANCIAL STATEMENTS -

Company A reported an income statement and balance sheet as shown below:

Company A
Income Statement
For the Years Ended
	2017
Sales	550.00
Cost of sales	275.00
Gross profit	275.00
SG&A	55.00
Depreciation	60.00
Interest	14.47
Pretax income	145.53
Tax	43.66
Net income	101.87

Company A
Balance Sheet
As of
	2017
Cash	60.00
Accounts receivable	5.00
Inventory	8.00
Total current assets	73.00
PP&E - gross	600.00
Accumulated depreciation	200.00
PP&E - net	400.00
Total assets	473.00
Accounts payable	20.00
Other current liabilities	10.00
Total current liabilities	30.00
Notes payable	241.13
Total liabilities	271.13
Common stock	100.00
Retained earnings	101.87
Total equity	201.87
Total liabilities and equity	473.00

Use the following assumptions to forecast pro-forma income statement and balance sheets for a 5-year period and a terminal year: (PLEASE SHOW FORMULAS USED TO SOLVE PROBLEM)

(a) Sales increase to $825 in the first year and then increase 20 percent the second year, 15 percent the third year, 10 percent in the fourth year, and 7 percent in the fifth year. Terminal year increases at the assumed growth rate of 4 percent.

(b) Cost of sales is 35 percent of sales.

(c) Sales, general, and administrative expenses are 15 percent of sales.

(d) Depreciation is 8 percent of gross end-of-year property, plant, and equipment.

(e) Interest expense is 5 percent of end-of-year notes payable.

(f) Tax expense is 35 percent of pretax income.

(g) Cash is equal to three month's cost of sales (use current year costs of sales divided by 4).

(h) Accounts receivable has a turnover ratio of 9.0.

(i) Inventory has a turnover ratio of 4.0

(j) Gross property, plant, and equipment gross at the same rate as sales.

(k) Accumulated depreciation increases in Years 1 through 5 by the amount of the current year depreciation. Accumulated depreciation in the terminal year is equal to $711.36

(l) Accounts payable has a turnover ratio of 6.0

(m) Other current liabilities are $35 in Year 1, increasing by $10 in each of Year 2 thorugh 5, and equal to $78.00 in the terminal year.

(n) Notes payable are $498.94 in Year 1, $521.48 in Year 2, $493,56 in Year 3, $401.47 in Year 4, $264.22 in Year 5, and $274.79 in the terminal year

(o) Common stock is remains at $100 in Years 1 through 5, increasing to $104 in the terminal year.

(p) Retained earnings increases by the current year net income less dividends of $125 in Year 1, $150.01 in Year 2, $174.99 in Year 3, $200.01 in Year 4, $224.99 in Year 5, and $339.19 in the terminal year.

q) The depreciation add back in the operating cash flow section of the statement of cash flows is equal to the change in accumulated depreciation for the year.

Answer 1

Company A
Income Statement
For the Years Ended
	2017	2018	2019	2020	2021	2022	Terminal year 2023
Sales	550.00	825.00	990.00	1,138.50	1,252.35	1,340.01	1,393.62
		1.50	(825*120%)	(990*115%)	(1138.50*110%)	(1252.35*107%)	(1340.01*104%)
Cost of Sales	275.00	288.75	346.50	398.48	438.32	469.01	487.77
		(825*35%)	(990*35%)	(1138.50*35%)	(1252.35*35%)	(1340.01*35%)	(1393.62*35%)
Gross Profit	275.00	536.25	643.50	740.03	814.03	871.01	905.85
SG&A	55.00	123.75	148.50	170.78	187.85	201.00	209.04
		(825*15%)	(990*15%)	(1138.50*15%)	(1252.35*15%)	(1340.01*15%)	(1393.62*15%)
Depreciation	60.00	72.00	86.40	99.36	109.30	116.95	27.36
		(900*8%)	(1080*8%)	(1242*8%)	(1366.2*8%)	(1461.83*8%)	(711.36-684)
Interest	14.47	24.95	26.07	24.68	20.07	13.21	13.74
		(498.94*5%)	(521.48*5%)	(493.56*5%)	(401.47*5%)	(264.22*5%)	(274.79*5%)
Pretax Income	145.53	315.55	382.53	445.21	496.81	539.85	655.71
Tax	43.66	110.44	133.88	155.82	173.88	188.95	229.50
(35% of Pretax Income)
Net Income	101.87	205.11	248.64	289.39	322.92	350.90	426.21

Company A
Balance sheet
As of
	2017	2018	2019	2020	2021	2022	Terminal year 2023
Cash	60.00	72.19	86.63	99.62	109.58	117.25	183.21
		(288.75/4)	(346.50/4)	(398.48/4)	(438.32/4)	(469.01/4)	balancing figure
Accounts Receivable	5.00	91.67	110.00	126.50	139.15	148.89	154.85
		(825/9)	(990/9)	(1138.5/9)	(1252.35/9)	(1340.01/9)	(1393.62/9)
Inventory	8.00	72.19	86.63	99.62	109.58	117.25	121.94
		(288.75/4)	(346.50/4)	(398.48/4)	(438.32/4)	(469.01/4)	(487.77/4)
Total Current Assets	73.00	236.04	283.25	325.74	358.31	383.39	460.00
PP&E - gross	600.00	900.00	1,080.00	1,242.00	1,366.20	1,461.83	1,520.31
		(600*150%)	(900*120%)	(1080*115%)	(1242*110%)	(1366.20*107%)	(1461.83*104%)
Accumulated Depreciation	200.00	272.00	358.40	457.76	567.06	684.00	711.36
		(200+72)	(272+86.4)	(358.40+99.36)	(457.76+109.30)	(+567.06+116.95)	given
PP&E - net	400.00	628.00	721.60	784.24	799.14	777.83	808.95
Total Assets	473.00	864.04	1,004.85	1,109.98	1,157.46	1,161.22	1,268.95
Accounts Payable	20.00	48.13	57.75	66.41	73.05	78.17	81.29
		(288.75/6)	(346.50/6)	(398.48/6)	(438.32/6)	(469.01/6)	(487.77/6)
Other Current Liabilities	10.00	35.00	45.00	55.00	65.00	75.00	78.00
		given	(35+10)	(45+10)	(55+10)	(65+10)	given
Total Current Liabilities	30.00	83.13	102.75	121.41	138.05	153.17	159.29
Notes Payable	241.13	498.94	521.48	493.56	401.47	264.22	274.79
Total Liabilities	271.13	582.07	624.23	614.97	539.52	417.39	434.08
Common Stock	100.00	100.00	100.00	100.00	100.00	100.00	104.00
Retained Earnings	101.87	181.98	280.61	395.01	517.92	643.83	730.86
Total Equity	201.87	281.98	380.61	495.01	617.92	743.83	834.86
Total Liabilities and Equity	473.00	864.04	1,004.84	1,109.98	1,157.45	1,161.22	1,268.94