Pro Forma Income Statement And Balance Sheet ✓ Solved

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Pro Forma Income Statement and Balance Sheet Below is the

Problem 1 Pro Forma Income Statement and Balance Sheet. Based on the historical statements and the additional information provided, construct the firm's pro forma income statement and balance sheet for 2014.

Pro Forma Income Statement for Blue Bill Corporation (2014)

Projected Revenue for 2014 can be calculated by increasing the 2013 revenue ($60,000) by 5%. This gives:

  • Projected Revenue = $60,000 * 1.05 = $63,000

Cost of Goods Sold (COGS) and Selling, General, and Administrative (SG&A) expenses will be derived from the average percent of sales over the past two years. Using the figures from 2013 gives the average percentages:

  • COGS (2013): $42,000 / $60,000 = 70%
  • SG&A (2013): $6,300 / $60,000 = 10.5%

Applying these percentages to the 2014 projected revenue results in:

  • COGS = 70% * $63,000 = $44,100
  • SG&A = 10.5% * $63,000 = $6,615

Now, adjusting for Depreciation expense, which increases to $2,200 and Interest expense, which is set at $1,900, we can compute the Earnings Before Interest and Taxes (EBIT):

  • EBIT = Projected Revenue - COGS - SG&A - Depreciation
  • EBIT = $63,000 - $44,100 - $6,615 - $2,200 = $10,085

The taxable income is then calculated as:

  • Taxable Income = EBIT - Interest Expense
  • Taxable Income = $10,085 - $1,900 = $8,185

The Income Tax Expense at the rate of 35% is:

  • Income Tax Expense = Taxable Income 35% = $8,185 0.35 = $2,865.75

Finally, calculating Net Income:

  • Net Income = Taxable Income - Income Tax Expense
  • Net Income = $8,185 - $2,865.75 = $5,319.25

Dividends increase to $850. Therefore, retained earnings are adjusted as follows:

  • Retained Earnings = Previous Retained Earnings + Net Income - Dividends
  • Retained Earnings = $18,420 + $5,319.25 - $850 = $22,889.25

Pro Forma Balance Sheet for Blue Bill Corporation (December 31, 2014)

Current Assets must include the minimum cash balance, which is 10% of projected sales:

  • Cash = $63,000 * 0.10 = $6,300

Accounts Receivable and Inventory remain the same percentage of sales as 2013:

  • Accounts Receivable = $3,150 / $60,000 * $63,000 = $3,292.5
  • Inventory = $9,450 / $60,000 * $63,000 = $9,901.5

Total current assets are now:

  • Total Current Assets = Cash + Accounts Receivable + Inventory
  • Total Current Assets = $6,300 + $3,292.5 + $9,901.5 = $19,494

Property, Plant, and Equipment (PP&E) will include the new $8,350 purchase, given the existing PP&E minus Accumulated depreciation:

  • Net PP&E = (Net PP&E 2013 + New PP&E) - Depreciation
  • Net PP&E = ($12,100 + $8,350) - $2,200 = $18,250

Total assets are now:

  • Total Assets = Total Current Assets + Net PP&E = $19,494 + $18,250 = $37,744

Current liabilities will include Accounts Payable and Other Current Liabilities (3% of sales):

  • Accounts Payable = $3,780 / $60,000 * $63,000 = $3,973.50
  • Other Current Liabilities = $63,000 * 0.03 = $1,890

Total Current Liabilities:

  • Total Current Liabilities = Accounts Payable + Bank Loan + Other Current Liabilities
  • Total Current Liabilities = $3,973.50 + $3,200 + $1,890 = $9,063.50

Long-term debt and common stock remain unchanged:

  • Long-term debt = $4,800
  • Common stock = $1,250

Retained earnings from above calculations = $22,889.25. To make the balance sheet balance, the bank loan must be adjusted:

  • Bank Loan (as a plug figure) = Total Assets - (Total Current Liabilities + Long-term debt + Common stock + Retained Earnings)
  • Bank Loan = $37,744 - ($9,063.50 + $4,800 + $1,250 + $22,889.25) = $37,744 - $37,002.75 = $741.25

Thus, the balance sheet represents:

  • Assets = $37,744
  • Liabilities = $9,063.50 + $4,800 + $741.25 = $14,604.75
  • Equity = Common Stock + Retained Earnings = $1,250 + $22,889.25 = $24,139.25

The resulting pro forma income statement and balance sheet reflect the projected financial position of Blue Bill Corporation as of 2014 based on the input data provided.

References

  • Gibson, C. H. (2012). Financial Reporting and Analysis. Cengage Learning.
  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Financial Accounting. Wiley.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • White, G. I., Sondhi, A. J., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
  • McKinsey & Company. (2020). Valuation: Measuring and Managing the Value of Companies. Wiley.
  • Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. McGraw-Hill.
  • Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practical Introduction. Wiley.
  • AICPA. (2017). Financial Reporting Framework for Small- and Medium-Sized Entities. American Institute of CPAs.
  • Albrecht, W. S., & Sack, R. J. (2000). Accounting Education: Charting the Course through a Perilous Future. American Accounting Association.
  • Damodaran, A. (2010). Applied Corporate Finance. Wiley.

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