Most Recent Financial Statements For Crosby Inc Follow Sa

The Most Recent Financial Statements For Crosbyinc Follow Sales F

The most recent financial statements for Crosby, Inc., follow. Sales for 2018 are projected to grow by 30 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously with sales. The task is to construct the pro forma income statement and balance sheet for Crosby, Inc., assuming fixed assets are sold to achieve 100 percent asset utilization. Calculate the external funding needed (EFN) based on these projections.

Paper For Above instruction

Crosby, Inc., is a company experiencing growth, and understanding its projected financial status requires constructing pro forma financial statements. This process involves predicting future financial outcomes based on current data and assumptions, notably a 30% increase in sales for 2018, while certain expenses and liabilities remain fixed or grow proportionally with sales. Accurately projecting includes adjusting the income statement and balance sheet to reflect anticipated changes and calculating the external funding needed (EFN) to support growth beyond internal financing capabilities.

Introduction

Financial planning is vital for corporations intending to sustain and manage growth effectively. Pro forma financial statements serve as instrumental tools, enabling managers and investors to forecast future positions, identify funding gaps, and strategize accordingly. Crosby, Inc., exemplifies a typical case where such projections are necessary, especially as it prepares to expand sales by 30% in 2018. The analysis involves constructing pro forma income and balance sheets, considering inherent assumptions about expense behavior, asset utilization, and external financing requirements.

Constructing the Pro Forma Income Statement

The initial step involves estimating the future sales figure:

Projected Sales for 2018 = $755,000 × 1.30 = $981,500

Given that costs and other expenses grow spontaneously with sales, their projected figures are calculated as proportionate increases:

• Costs: $590,000 × 1.30 = $767,000
• Other expenses: $26,000 × 1.30 = $33,800

earnings before interest and taxes (EBIT) are calculated as:

EBIT = Sales − Costs − Other Expenses = $981,500 − $767,000 − $33,800 = $180,700

Interest expense remains constant at $22,000. Therefore, taxable income is:

Taxable Income = EBIT − Interest = $180,700 − $22,000 = $158,700

Applying the tax rate of 22%, taxes are determined as:

Taxes = $158,700 × 0.22 = $34,914

Net income for 2018 is thus:

Net Income = Taxable Income − Taxes = $158,700 − $34,914 = $123,786

Constructing the Pro Forma Balance Sheet

Asset and liability adjustments require understanding the nature of each account. Fixed assets are sold and replaced such that asset utilization reaches 100%, implying new fixed assets equal projected sales or an equivalent ratio. The original fixed assets are $431,000, representing 80% capacity. At full capacity, fixed assets should be:

Full capacity fixed assets = $431,000 / 0.80 = $538,750

Assuming the firm adjusts fixed asset holdings to this level, the net plant and equipment is projected as:

Net plant and equipment = $538,750

Current assets, which increase spontaneously with sales, are calculated as:

• Cash: Beginning cash = $21,440. Assuming cash needs remain stable or proportional, an estimate is based on previous ratios, or simply scaled accordingly.
• Accounts receivable: $44,380 × 1.30 = $57,694
• Inventory: $99,960 × 1.30 = $129,948

Total current assets then sum to:

Current assets total = Cash + Accounts receivable + Inventory

Increased current assets are thus approximately:

• Cash: $21,440 (assuming no change for simplicity) or adjusted proportionally; for this example, retain previous cash since the problem does not specify growth
• Accounts receivable: $44,380 × 1.30 = $57,694
• Inventory: $99,960 × 1.30 = $129,948

Total current assets = $21,440 + $57,694 + $129,948 = $209,082

Accounts payable, which also grows spontaneously, increases by 30%:

Accounts payable = $55,600 × 1.30 = $72,280

Notes payable are assumed constant at $14,800, as it is not stated otherwise. Total current liabilities are:

Total current liabilities = Accounts payable + Notes payable = $72,280 + $14,800 = $87,080

Long-term debt remains at $138,000, and owner’s equity can be updated via retained earnings, which increases amount to net income less dividends. Dividends paid are proportional to net income, with previous dividends being $28,291. Assuming the dividend payout ratio remains constant:

Payout ratio = Dividends / Net income (2017) = $28,291 / $91,260 ≈ 0.31

Projected dividends for 2018:

Dividends = Net income (2018) × payout ratio = $123,786 × 0.31 ≈ $38,373

Retained earnings at year-end are:

Retained earnings = Previous retained earnings + Net income − Dividends

Retained earnings (2018) = $269,880 + $123,786 − $38,373 = $355,293

Calculating External Funding Needed (EFN)

EFN is the difference between total projected assets and total projected liabilities plus equity:

Total assets = Fixed assets + Current assets = $538,750 + $209,082 = $747,832

Total liabilities and equity:

• Current liabilities = $87,080
• Long-term debt = $138,000
• Owner’s equity = Previous equity + Retained earnings (new) + Common stock (assumed unchanged)

Owner’s equity at the end of 2018 calculation:

Owner’s equity = Previous owner’s equity + Change in retained earnings = $269,880 + ($123,786 − dividends) = $269,880 + ($123,786 − $38,373) = $269,880 + $85,413 = $355,293

Adding equity components:

Total liabilities and equity = $87,080 + $138,000 + $355,293 = $580,373

EFN = Total projected assets − Total liabilities and equity

EFN = $747,832 − $580,373 = $167,459

A positive EFN indicates additional financing needed. Therefore, Crosby, Inc., requires approximately $167,459 in external funding to finance its projected growth for 2018.

Conclusion

The construction of pro forma financial statements for Crosby, Inc., reveals a significant external funding requirement of approximately $167,459 to sustain a 30% growth in sales while maintaining full asset utilization. This analysis underscores the importance of comprehensive financial planning, particularly the role of internal cash flows, debt, and equity financing in supporting growth. Managers must consider whether internal earnings and liabilities suffice or if new equity or debt must be raised to fund expansion plans.

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