Integrative—Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided in what follows to prepare the financial plans.
Red Queen Restaurants |
|
Sales revenue |
$800,000 |
Less: Cost of goods sold |
600,000 |
Gross profits |
$200,000 |
Less: Operating expenses |
100,000 |
Net profits before taxes |
$100,000 |
Less: Taxes (rate = 40%) |
40,000 |
Net profits after taxes |
$60,000 |
Less: Cash dividends |
20,000 |
To retained earnings |
$40,000 |
Red Queen Restaurants Balance Sheet December 31, 2003 |
|||
Assets |
Liabilities and Stockholders’ Equity |
||
Cash |
$32,000 |
Accounts payable |
$100,000 |
Marketable securities |
18,000 |
Taxes payable |
20,000 |
Accounts receivable |
150,000 |
Other current liabilities |
5,000 |
Inventories |
100,000 |
Total current liabilities |
$125,000 |
Total current assets |
$300,000 |
Long term debt |
$200,000 |
Net fixed assets |
$350,000 |
Common stock |
$150,000 |
Total assets |
$650,000 |
Retained earnings |
$175,000 |
Total liabilities and |
|
||
|
|
stockholders’ equity |
$650,000 |
The following financial data are also available:
(1) The firm has estimated that its sales for 2004 will be $900,000.
(2) The firm expects to pay $35,000 in cash dividends in 2004.
(3) The firm wishes to maintain a minimum cash balance of $30,000.
(4) Accounts receivable represent approximately 18% of annual sales.
(5) The firm’s ending inventory will change directly with changes in sales in
2004.
(6) A new machine costing $42,000 will be purchased in 2004. Total depreciation for 2004 will be $17,000.
(7) Accounts payable will change directly in response to changes in sales in 2004.
(8) Taxes payable will equal one fourth of the tax liability on the pro forma income statement.
(9) Marketable securities, other current liabilities, long term debt, and common stock will remain unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2004, using the percent of sales method.
b. Prepare a pro forma balance sheet dated December 31, 2004, using the judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required.