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Using the following income statement, balance sheet and additional information complete...

Q No 4 Using the following income statement, balance sheet and additional information complete the tasks mention below.

Income Statement
Sale	4,200
Operating costs	3,780
EBIT	420
Interest	120
EBT	300
Taxes (40%)	120
Net Income	180
Dividends	0
Addition to retrained earnings	180

Balance Sheet
Cash and marketable securities	42
Accounts receivable	336
Inventories	441
Current Assets	819
Net fixed assets	2,562
Total Assets	3,381
Accounts payable and accruals	168
Notes payable	250
Current liabilities	418
Long term debt	700
Common stock	400
Retained earnings	1863
Total liabilities and equity	3,381

In developing its forecast for the upcoming year, the company has assembled the following information:

Sales are expected to increase by 8 % this upcoming year.
Operating costs are expected to remain at 90% of sales.
Cash and marketable securities are expected to remain at 1% of sales
Accounts receivable are expected to remain at 8% of sales
Due to excess capacity, the company expects that its year-end inventories will remain at current levels.
Fixed assets are expected to remain at 61% of sales
Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.
The company will continue to pay a zero dividend, and its tax rate will remain at 40%.
The company anticipates that any additional funds needed will be raised in the following manner: 25% notes payable, 25% long-term debt, and 50% common stock.

Task:

Based on the assumptions listed above, construct a Pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is assume interest will remain unchanged even though the company may increase its debt).

Based upon this forecast, describe changes from the prior year that should expect in its return on equity, inventory turnover ratio, and profit margin

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Advanced Accounting 4 years ago 1 Answer Maria Azher

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<p><strong>Q No 4</strong> Using the following income statement, balance sheet and additional information complete the tasks mention below.</p>
<table width="335">
<tbody>
<tr>
<td colspan="2" width="335">
<p>Income Statement</p>
</td>
</tr>
<tr>
<td width="282">
<p>Sale</p>
</td>
<td width="53">
<p>4,200</p>
</td>
</tr>
<tr>
<td width="282">
<p>Operating costs</p>
</td>
<td width="53">
<p>3,780</p>
</td>
</tr>
<tr>
<td width="282">
<p>EBIT</p>
</td>
<td width="53">
<p>420</p>
</td>
</tr>
<tr>
<td width="282">
<p>Interest</p>
</td>
<td width="53">
<p>120</p>
</td>
</tr>
<tr>
<td width="282">
<p>EBT</p>
</td>
<td width="53">
<p>300</p>
</td>
</tr>
<tr>
<td width="282">
<p>Taxes (40%)</p>
</td>
<td width="53">
<p>120</p>
</td>
</tr>
<tr>
<td width="282">
<p>Net Income</p>
</td>
<td width="53">
<p>180</p>
</td>
</tr>
<tr>
<td width="282">
<p>Dividends</p>
</td>
<td width="53">
<p>0</p>
</td>
</tr>
<tr>
<td width="282">
<p>Addition to retrained earnings</p>
</td>
<td width="53">
<p>180</p>
</td>
</tr>
<tr>
<td width="282">
<p> </p>
</td>
<td width="53">
<p> </p>
</td>
</tr>
<tr>
<td colspan="2" width="335">
<p>Balance Sheet</p>
</td>
</tr>
<tr>
<td width="282">
<p>Cash and marketable securities</p>
</td>
<td width="53">
<p>42</p>
</td>
</tr>
<tr>
<td width="282">
<p>Accounts receivable</p>
</td>
<td width="53">
<p>336</p>
</td>
</tr>
<tr>
<td width="282">
<p>Inventories</p>
</td>
<td width="53">
<p>441</p>
</td>
</tr>
<tr>
<td width="282">
<p>Current Assets</p>
</td>
<td width="53">
<p>819</p>
</td>
</tr>
<tr>
<td width="282">
<p>Net fixed assets</p>
</td>
<td width="53">
<p>2,562</p>
</td>
</tr>
<tr>
<td width="282">
<p>Total Assets</p>
</td>
<td width="53">
<p>3,381</p>
</td>
</tr>
<tr>
<td width="282">
<p>Accounts payable and accruals</p>
</td>
<td width="53">
<p>168</p>
</td>
</tr>
<tr>
<td width="282">
<p>Notes payable</p>
</td>
<td width="53">
<p>250</p>
</td>
</tr>
<tr>
<td width="282">
<p>Current liabilities</p>
</td>
<td width="53">
<p>418</p>
</td>
</tr>
<tr>
<td width="282">
<p>Long term debt</p>
</td>
<td width="53">
<p>700</p>
</td>
</tr>
<tr>
<td width="282">
<p>Common stock</p>
</td>
<td width="53">
<p>400</p>
</td>
</tr>
<tr>
<td width="282">
<p>Retained earnings</p>
</td>
<td width="53">
<p>1863</p>
</td>
</tr>
<tr>
<td width="282">
<p>Total liabilities and equity</p>
</td>
<td width="53">
<p>3,381</p>
</td>
</tr>
</tbody>
</table>
<p> </p>
<p>In developing its forecast for the upcoming year, the company has assembled the following information:</p>
<ul>
<li>Sales are expected to increase by 8 % this upcoming year.</li>
<li>Operating costs are expected to remain at 90% of sales.</li>
<li>Cash and marketable securities are expected to remain at 1% of sales</li>
<li>Accounts receivable are expected to remain at 8% of sales</li>
<li>Due to excess capacity, the company expects that its year-end inventories will remain at current levels.</li>
<li>Fixed assets are expected to remain at 61% of sales</li>
<li>Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.</li>
<li>The company will continue to pay a zero dividend, and its tax rate will remain at 40%.</li>
<li>The company anticipates that any additional funds needed will be raised in the following manner: 25% notes payable, 25% long-term debt, and 50% common stock.</li>
</ul>
<p><strong><em>Task:</em></strong></p>
<ol>
<li>Based on the assumptions listed above, construct a Pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is assume interest will remain unchanged even though the company may increase its debt). </li>
</ol>
<p>Based upon this forecast, describe changes from the prior year that should expect in its return on equity, inventory turnover ratio, and profit margin</p>

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