Question

The following Income Statement and Balance Sheet should be used:

Creative Analysis, Inc.
2015 Income Statement

Net sales

$8,500

Cost of goods sold

7,210

Depreciation

400

Earnings before interest and
taxes

890

Interest paid

40

Taxable Income

$850

Taxes

310

Net Income

$540

Dividends

$324

Addition to retained earnings

$216

Creative Analysis, Inc.
2015 Balance Sheet

Cash

$1,600

Accounts Payable

$2,075

Accounts Rec.

975

Long-term debt

425

Inventory

2,425

Common stock

3,000

Total

$5,000

Retained earnings

1,700

Net fixed
assets

2,200

Total assets

$7,200

Total Liabilities & equity

$7,200

Assume the profit margin and the dividend payout ratio of Creative Analysis, Inc. are constant. If sales increase by 8 percent, what is the pro forma retained earnings?

Select one:
a. $1,870.00
b. $237.60
c. $356.40
d. $1,933.28

Answer 1

Profit margin = Net income / sales = $540 / $8,500 = 6.35%

New sales = Sales * (1 + growth rate) = $8,500 * (1 + 8%) = $9,180

New net income = New sales * profit margin = $9,180 * 6.35% = $583.20

Retention ratio = Retained earnings / Net income = $216 / $540 = 40%

addition to retained earnings = New net income * Retention ratio = $583.20 * 40% = $233.28

Pro forma retained earnings = $1,700 + $233.28 = $1,933.28

Pro forma retained earnings = $1,933.28