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
Income Statement for the
Year Ended December 31, 2003

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.