Question: Provincial Imports Inc. has assembled past (2019)
Provincial Imports Inc. has assembled past (2019) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year (2020).
Information related to financial projections for the year 2020 is as follows:
(1) Projected sales are $6,000,000.
(2) Cost of goods sold in 2019 includes $1,000,000 in fixed costs.
(3) Operating expense in 2019 includes $250,000 in fixed costs.
(4) Interest expense will remain unchanged.
(5) The firm will pay cash dividends amounting to 40% of net profits after taxes.
(6) Cash and inventories will double.
(7) Marketable securities, notes payable, long-term debt, and common stock will remain unchanged.
(8) Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales.
(9) A new computer system costing $356,000 will be purchased during the year. Total depreciation expense for the year will be $110,000.
(10) The tax rate will remain at 40%.
a. Prepare a pro forma income statement for the year ended December 31, 2020, using the fixed cost data given to improve the accuracy of the percent-of-sales method.
b. Prepare a pro forma balance sheet as of December 31, 2020, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account.
c. Analyze these statements, and discuss the resulting external financing required.
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Provincial Imports Inc. Income Statement for the Year Ended December 31, 2019 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense $5,000,000 2,750,000 $2,250,000 850,000 $1,400,000 200,000 $1,200,000 480,000 $ 720,000 Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Cash dividends 288,000 $ 432,000 To retained earnings Provincial Imports Inc. Balance Sheet December 31, 2019 Liabilities and stockholders’ equity Assets $ 200,000 $ 700,000 95,000 Cash Accounts payable Taxes payable Notes payable Marketable securities 225,000 Accounts reccivable 625,000 200,000 Inventories 500,000 Other current liabilitics 5,000 $1,000,000 500,000 $1,500,000 Total current assets $1,550,000 Total current liabilities Net fixed assets Long-term debt 1,400,000 $2,950,000 Total assets Total liabilitics Common stock 75,000 Retained carnings Total liabilities and cquity 1,375,000 $2,950,000
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