Pro Forma Income Statement And Balance Sheet Below Is The In ✓ Solved

Pro Forma Income Statement And Balance Sheetbelow Is The Income

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 $63,000
  • Cost of goods sold 42,000 44,100
  • Gross margin 18,000 18,900
  • SG&A expense 6,000 6,300
  • Depreciation expense 1,800 2,000
  • Earnings Before Interest and Taxes (EBIT) 10,200 10,600
  • Interest expense 1,500 1,800
  • Taxable income 8,700 8,800
  • Income Tax Expense 3,045 3,080
  • Net income 5,655 5,720
  • Dividends To retained earnings $4,905 $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 10% 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 Instructions

To construct the pro forma income statement and balance sheet for Blue Bill Corporation for the year 2014 based on the provided data from 2013, we will follow a systematic approach. The initial step involves forecasting the revenue based on the expected 5% increase from the previous year.

The projected revenue for 2014 can be calculated as follows:

Projected Revenue for 2014 = $63,000 * (1 + 0.05) = $66,150.

Next, we will determine the projected Cost of Goods Sold (COGS) and Selling, General & Administrative (SG&A) expenses using the average percentage of sales derived from the historical data. The historical COGS and SG&A percentages are:

  • COGS for 2013: $44,100 on revenue of $63,000 = 70%.
  • SG&A for 2013: $6,300 on revenue of $63,000 = 10%.

Using these average percentages, the calculations for 2014 would be:

Projected COGS for 2014 = 70% * $66,150 = $46,305.

Projected SG&A for 2014 = 10% * $66,150 = $6,615.

The Depreciation expense is projected to increase to $2,200 as stated. For Earnings Before Interest and Taxes (EBIT) we will calculate:

EBIT = Projected Revenue - COGS - SG&A - Depreciation

EBIT = $66,150 - $46,305 - $6,615 - $2,200 = $11,030.

The Interest Expense for 2014 is projected to be $1,900. Thus, Taxable Income can be calculated:

Taxable Income = EBIT - Interest Expense

Taxable Income = $11,030 - $1,900 = $9,130.

Next, considering the tax rate of 35%, the Income Tax Expense will be:

Income Tax Expense = Taxable Income * Tax Rate

Income Tax = $9,130 * 0.35 = $3,195.5 (rounded to $3,196).

Finally, Net Income can be determined:

Net Income = Taxable Income - Income Tax Expense

Net Income = $9,130 - $3,196 = $5,934.

Since the dividends are expected to increase to $850, the retained earnings for 2014 will be:

Retained Earnings = Previous Retained Earnings + Net Income - Dividends

Retained Earnings = $18,420 + $5,934 - $850 = $23,504.

Now, let’s transition to the balance sheet. The cash balance must meet the minimum requirement of 10% of sales for 2014:

Required Cash = 10% * $66,150 = $6,615.

For Accounts Receivable, Accounts Payable, and Inventory, we will maintain the same percentages of sales as in 2013:

  • Accounts Receivable: $3,150 / $63,000 = 5% of sales.
  • Accounts Payable: $3,780 / $63,000 = 6% of sales.
  • Inventory: $9,450 / $63,000 = 15% of sales.

Using these percentages for 2014:

  • Accounts Receivable = 5% * $66,150 = $3,308.
  • Accounts Payable = 6% * $66,150 = $3,969.
  • Inventory = 15% * $66,150 = $9,922.5 (rounded to $9,923).

Now calculating Total Current Assets:

Total Current Assets = Cash + Accounts Receivable + Inventory

Total Current Assets = $6,615 + $3,308 + $9,923 = $19,846.

The Net Property, Plant, and Equipment will adjust for the new PP&E purchase:

New PP&E = Existing PP&E + New Purchase - Accumulated Depreciation

New PP&E = $12,100 + $8,350 - $16,400 = $4,050.

Total Assets for 2014 will be:

Total Assets = Current Assets + Net PP&E = $19,846 + $4,050 = $23,896.

For Current Liabilities and Long-term Debt, we will keep long-term debt constant at $4,800. Total Current Liabilities are:

Total Current Liabilities = Accounts Payable + Other Current Liabilities

Other Current Liabilities = 3% * $66,150 = $1,984.5 (rounded to $1,985).

Total Current Liabilities = $3,969 + $1,985 = $5,954.

Finally, the Total Liabilities and Equity can be determined by ensuring that both sides of the balance sheet balance. Therefore, the bank loan will adjust to make it balance:

Total Liabilities and Equity = Total Current Liabilities + Long-term Debt + Common Stock + Retained earnings = $5,954 + $4,800 + $1,250 + $23,504 = $35,508.

Now, in checking alignment with Assets, the final figure for the bank loan (as the plug figure) will be necessary to ensure the accuracy of this reporting. Following these calculations results in the pro forma income statement and balance sheet for Blue Bill Corporation for 2014.

References

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