Pro Forma Income Statement And Balance Sheet 013963

Pro Forma Income Statement And Balance Sheet

Problem 1 Pro Forma Income Statement and Balance Sheet Below is the income statement and balance sheet for Blue Bill Corporation for 2013. Based on the historical statements and the additional information provided, construct the firm's pro forma income statement and balance sheet for 2014.

Blue Bill Corporation Income Statement For the year ended 2013

• Projected Revenue: $60,000
• Cost of goods sold: $42,100
• Gross margin: $18,900
• SG&A expense: $6,300
• Depreciation expense: $1,000
• Earnings Before Interest and Taxes (EBIT): $10,600
• Interest expense: $1,800
• Taxable income: $8,800
• Income Tax Expense: $3,080
• Net income: $5,720
• Dividends: $4,905
• To retained earnings: $4,920

Additional income statement information: Sales will increase by 5% in 2014 from 2013 levels. COGS and SG&A will be the average percent of sales for the last 2 years. Depreciation expense will increase to $2,200. Interest expense will be $1,900. The tax rate is 35%. Dividend payout will increase to $850.

Blue Bill Corporation Balance Sheet December 31, 2013

• Current assets: Cash $8,000; Accounts receivable $3,150; Inventory $9,450; Total current assets: $20,600
• Property, plant, and equipment (PP&E): $28,500; Accumulated depreciation: $16,400; Net PP&E: $12,100
• Total assets: $32,700
• Current liabilities: Accounts payable $3,780; Bank loan (10%) $3,200; Other current liabilities $1,250; Total current liabilities: $8,230
• Long-term debt (12%): $4,800
• Common stock: $1,250
• Retained earnings: $18,420
• Total liabilities and equity: $32,700

Additional balance sheet information: The minimum cash balance is 12% of sales. Working capital accounts (accounts receivable, accounts payable, and inventory) will be the same percent of sales in 2014 as they were in 2013. $8,350 of new PP&E will be purchased in 2014. Other current liabilities will be 3% of sales in 2014. There will be no changes in the common stock or long-term debt accounts. The plug figure (the last number entered that makes the balance sheet balance) is bank loan.

Paper For Above instruction

The task requires constructing the pro forma income statement and balance sheet for Blue Bill Corporation for 2014, based on the data and assumptions provided. The process involves projecting revenues and expenses, calculating net income, and updating the balance sheet to reflect new assets, liabilities, and retained earnings, considering growth rates, expense ratios, and financial policies.

Introduction

Financial planning is crucial for corporate growth and sustainability. Pro forma financial statements serve as essential tools that help managers forecast future financial performance based on historical data and strategic assumptions. For Blue Bill Corporation, accurately projecting the income statement and balance sheet for 2014 involves integrating various assumptions regarding sales growth, expense ratios, asset purchases, and financing changes. This paper provides a comprehensive approach to creating these projections, emphasizing the interconnectedness of income statement items and balance sheet accounts, and illustrating how strategic assumptions influence corporate financial planning.

Projected Income Statement for 2014

To prepare the pro forma income statement for 2014, we start with the projected sales increase. A 5% growth over 2013 sales of $60,000 results in projected sales of $63,000 for 2014. Using this sales figure, other income statement components are derived based on historical ratios and provided assumptions.

Firstly, cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A) are averaged as percentages of sales over 2012 and 2013. COGS as a percentage of sales in 2013 is calculated as $42,100 / $60,000 ≈ 70.17%. Similarly, SG&A in 2013 is $6,300 / $60,000 ≈ 10.5%. Applying these ratios to projected 2014 sales yields COGS of approximately $44,153 and SG&A of about $6,615.

Depreciation expense is explicitly increased to $2,200, reflecting planned asset depreciation. Interest expense is forecasted at $1,900, based on the assumption for 2014. The taxable income is then calculated as EBIT minus interest expense, which, considering the gross margin and expenses, leads to a taxable income of approximately $9,597, with taxes at 35%, resulting in net income of around $6,238.

The dividend payout policy shifts, with dividends increasing to $850 from previous levels, retained earnings are adjusted accordingly, contributing to the future growth of the company.

Balance Sheet Projection for 2014

Assets are projected based on the company's policies and growth assumptions. Cash holdings are maintained at a minimum of 12% of sales, leading to a projected cash balance of $7,560. Accounts receivable are kept at the same percentage of sales as 2013, which was 3,150 / 60,000 ≈ 5.25%, resulting in an AR of approximately $3,307. Inventory, similarly, is maintained at about 15.75% of sales, totaling approximately $10,493.

The purchase of new Property, Plant, and Equipment (PP&E) is mandated at $8,350. The existing net PP&E is adjusted for depreciation and new acquisitions. Accumulated depreciation increases by the new depreciation expense, and the net PP&E reflects these changes.

Liabilities are adjusted according to policy. Accounts payable are set at 6% of sales, or approximately $3,780. Other current liabilities are projected at 3% of sales, totaling $1,890. The bank loan, being the plug figure, is calculated as needed to balance the balance sheet, considering the new assets and liabilities. Long-term debt remains unchanged at $4,800, and shareholders’ equity is updated through retained earnings, which increase by net income less dividends.

Conclusion

Developing pro forma financial statements involves a detailed understanding of historical ratios, company policies, and strategic assumptions. For Blue Bill Corporation, the projected 2014 income statement and balance sheet reflect growth in sales, increased expenses, and prudent asset management. These projections are vital for internal planning, investor communication, and securing financing, underpinning the company's sustainable growth trajectory. Accurate projections help management anticipate future financing needs and operational challenges, supporting informed decision-making in alignment with corporate objectives.

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