Pro forma balance sheet—Basic Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2004. The firm expects 2004 sales to total $3,000,000. The following information has been gathered.
(1) A minimum cash balance of $50,000 is desired.
(2) Marketable securities are expected to remain unchanged.
(3) Accounts receivable represent 10% of sales.
(4) Inventories represent 12% of sales.
(5) A new machine costing $90,000 will be acquired during 2004. Total depreciation for the year will be $32,000.
(6) Accounts payable represent 14% of sales.
(7) Accruals, other current liabilities, long term debt, and common stock are expected to remain unchanged.
(8) The firm’s net profit margin is 4%, and it expects to pay out $70,000 in cash dividends during 2004. (9) The December 31, 2003, balance sheet follows.
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Leonard Industries Balance Sheet December 31, 2003 |
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Assets |
Liabilities and Stockholders’ Equity |
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Cash |
$45,000 |
Accounts payable |
$395,000 |
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Marketable securities |
15,000 |
Accruals |
60,000 |
|
Accounts receivable |
255,000 |
Other current liabilities |
30,000 |
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Inventories |
340,000 |
Total current liabilities |
$485,000 |
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Total current assets |
$655,000 |
Long term debt |
$350,000 |
|
Net fixed assets |
$600,000 |
Common stock |
$200,000 |
|
Total assets |
$1,255,000 |
Retained earnings |
$220,000 |
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Total liabilities and |
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|
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stockholders’ equity |
$1,255,000 |
a. Use the judgmental approach to prepare a pro forma balance sheet dated December 31, 2004, for Leonard Industries.
b. How much, if any, additional financing will Leonard Industries require in 2004? Discuss.
c. Could Leonard Industries adjust its planned 2004 dividend to avoid the situation described in part b? Explain how.