Question

1. Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

   The following financial data are also available:

   1. The firm has estimated that its sales for 2020 will be $900,000.

   2. The firm expects to pay $35,000 in cash dividends in 2020.

   3. The firm wishes to maintain a minimum cash balance of $30,000.

   4. Accounts receivable represent approximately 18% of annual sales.

   5. The firm’s ending inventory will change directly with changes in sales in 2020.

   6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.

   7. Accounts payable will change directly in response to changes in sales in 2020.

   8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.

   9. Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.

   1. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.

   2. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.

   3. Analyze these statements, and discuss the resulting external financing required.

      Red Queen Restaurants Income Statement for the Year Ended December 31, 2019

      Sales revenue $800,000 Less: Cost of goods sold    600,000       Gross profits $200,000 Less: Operating expenses    100,000       Net profits before taxes $100,000 Less: Taxes (rate = 21%)    21,000       Net profits after taxes $ 79,000 Less: Cash dividends    20,000       To retained earnings $ 59,000

      Red Queen Restaurants Balance Sheet December 31, 2019

      Assets Liabilities and stockholders’ equity Cash $ 32,000 Accounts payable $100,000 Marketable securities 18,000 Taxes payable 20,000 Accounts receivable 150,000 Other current liabilities   5,000 Inventories    100,000      Total current liabilities $125,000      Total current assets $300,000 Long-term debt    200,000 Net fixed assets    350,000      Total liabilities $325,000      Total assets $650,000 Common stock 150,000 Retained earnings    175,000 Total liabilities and stockholders’ equity $650,000

2. LG 5

Answer 1

Red Queens Restaurants
Income Statement
For the Year Ended December 31, 2019
	Amount	% of Sales
Sales revenue	$800,000
Less: Cost of goods sold	$600,000	75.00%
Gross profit	$200,000	25.00%
Less: Operating expenses	$100,000	12.50%
Net Profits before taxes	$100,000	12.50%
Less: Tax	$ 21,000
Net profits after taxes	$ 79,000
Cash Dividend	$ 20,000
Retained Earnings	$ 59,000

Red Queens Restaurants
Income Statement
For the Year Ended December 31, 2020
	Amount	% of Sales
Sales revenue	$900,000
Less: Cost of goods sold	$675,000	75.00%
Gross profit	$225,000	25.00%
Less: Operating expenses	$112,500	12.50%
Net Profits before taxes	$112,500	12.50%
Less: Tax	$ 23,625
Net profits after taxes	$ 88,875
Cash Dividend	$ 35,000
Retained Earnings	$ 53,875

Red Queens Restaurants
Pro forma Balance Sheet
December 31, 2020
Assets			Liabilities and Stockholders' equity
Cash	$ 34,781	30000+4781	Accounts payable	$112,500	12.5% of Sales
Marketable securities	$ 18,000	Same as 2019	Taxes payable	$    5,906	25% of Tax Liability
Accounts receivable	$162,000	18% of Sales	Other current liabilities	$    5,000	Same as 2019
Inventories	$112,500	12.5% of Sales	External Financing	$          -	Balancing figure
Total current assets	$327,281		Total current liabilities	$123,406
Net fixed assets	$375,000	(350000+42000-17000)	Long-term debt	$200,000	Same as 2019
Total assets	$702,281		Total liabilities	$323,406
			Common stocks	$150,000	Same as 2019
			Retained earnings	$228,875	(175000+53875)
			Total liabilities and stockholders' equity	$702,281

External financing required: $4,781