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 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 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.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter12: Fainancial Statement Analysis

Section: Chapter Questions

Problem 90PSA

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Question

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 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 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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