Question

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

Answer 1

Pro forma income statement for the year ended December 31, 2020

Particulars    Amount ($) Year ended 31stDecember,2020

Sales Revenue 900000

LESS:Cost of Goods Sold 675000

Gross Profit 225000

LESS: Operating Expenses    112500

Net Profit before Taxes 112500

LESS: Taxes paid(21%) 23625

Net Profit after Taxes    88875  

LESS: Cash Dividend 35000

Retained Earnings 53875

Pro forma Balance Sheet dated December 31, 2020

ASSETS AMOUNT ($)    LIABILITIES & EQUITY   AMOUNT($)

Cash    30000   Accounts Payable 112500

Marketable Securities   18000   Taxes Payable 5906

Accounts Receivable 162000 Other Current Liabilities 5000

Inventories 112500       Total Current Liabilities 123406

Total Current Assets 322500    Long Term Debt 200000

Net Fixed Assets 375000 Common Stock 150000

Total Fixed Assets 697500 Retained Earnings    228875

Temporary Investment Required 4781    

TOTAL 702281 TOTAL 702281