Lorien Company wishes to prepare a forecasted income statement, a forecasted balance sheet, and a forecasted statement of cash flows for 2012. Lorien’s balance sheet and income statement for 2011 follow:
Balance Sheet 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 1,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,390
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100
Bank loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . $1,390
Income Statement 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60
In addition, Lorien has assembled the following forecasted information for 2012.
(a) Sales are expected to increase to $1,200.
(b) Lorien does not expect to buy any new property, plant, and equipment during
2012.
(c) Because of adverse banking conditions, Lorien does not expect to receive any new bank loans in 2012.
(d) Lorien plans to pay cash dividends of $15 in 2012.
Instructions:
1. Prepare a forecasted balance sheet, a forecasted income statement, and a forecasted statement of cash flows for 2012. Clearly state what assumptions you make. Use the indirect method for reporting cash from operating activities.
2. If you have constructed your forecasted cash flow statement correctly, you will see that Lorien plans to distribute cash to shareholders through two different means in 2012. Which of these methods involves distributing an equal amount of cash for each share owned? Which of these methods channels the cash to shareholders who are the least optimistic about the prospects of the company?