Question

You are preparing to discuss borrowing needs with your​ bank's loan officer who asks you to prepare​ pro-forma financial statements. Below are the financial statements for the year just ended. Your sales department is projecting a 32​% increase in sales. Days sales outstanding are expected to improve to 45 days. With respect to inventory and accounts​ payable, assume that purchases will be ​$10,890,000 and cash payments will be ​$9,801,000. The Company expects to invest ​$1,670,000 ​(net of​ depreciation) to expand its storage capacity and achieve scale savings. ​ Accordingly, gross profit margins are expected to be 25​% in the future. Other expenses are expected to remain the same percentage of sales. The retention ratio is 45​%. For ease of​ calculation, assume interest expense remains the same. Prepare​ pro-forma financial statements and determine the amount of borrowing​ needs, which will be reflected in​ long-term debt.​ (round your answers to the nearest​ integer, and fill in all amounts including​ totals

Cash	400,000		Sales	​10,000,000
Accounts Receivable	​1,400,000		Cost of Sales	​8,000,000
Inventory	​1,800,000		Gross Profit	​2,000,000
Total current Assets	​3,600,000		Operating Expense	​900,000
Fixed Assets	​1,400,000		EBIT	​1,100,000
Total Assets	​5,000,000		Interest Exp	​100,000
			EBT	​1,000,000
Accounts Payable	​1,200,000		Tax​ (30%)	​300,000
​Long-term Debt	​1,000,000		Net Income	​700,000
Total Debt	​2,200,000
Common Stock	​1,300,000
Retained earnings	​1,500,000
Total Debt and Equity	​5,000,000

Answer 1

INCOME STATEMENT
	Last year	Basis for Projections	This year Projections
Sales	10000000	+32%	13200000
Cost of Sales	8000000		9900000
Gross Profit	2000000	25% of sales	3300000
Operating Expense	900000	9% of sales	1188000
EBIT	1100000		2112000
Interest Exp	100000		100000
EBT	1000000		2012000
Tax​ (30%)	300000		603600
Net Income	700000		1408400
Retention (45%)			633780
BALANCE SHEET
	Last year	Basis for Projections	This year Projections	After financing
Cash	400000	4% of sales of 13200000	528000	528000
Accounts Receivable	1400000	= 13200000*45/365 =	1627397	1627397
Inventory	1800000	=1800000+10890000-9900000 =	2790000	2790000
Total current Assets	3600000		4945397	4945397
Fixed Assets	1400000	+1670000 =	3070000	3070000
Total Assets	5000000		8015397	8015397
Accounts Payable	1200000	=1200000+10890000-9801000	2289000	2289000
​Long-term Debt	1000000		1000000	2292617
Total Debt	2200000		3289000	4581617
Common Stock	1300000		1300000	1300000
Retained earnings	1500000	+633780	2133780	2133780
Total Debt and Equity	5000000		6722780	8015397
		Borrowing needs	1292617