Question

Financing Deficit

Garlington Technologies Inc.'s 2019 financial statements are shown below:

Income Statement for December 31, 2019

Sales	$4,000,000
Operating costs	3,200,000
EBIT	$  800,000
Interest	120,000
Pre-tax earnings	$  680,000
Taxes (25%)	170,000
Net income	510,000
Dividends	$  190,000

Balance Sheet as of December 31, 2019

Cash	$   160,000		Accounts payable	$   360,000
Receivables	360,000		Line of credit	0
Inventories	720,000		Accruals	200,000
Total CA	$1,240,000		Total CL	$   560,000
Fixed assets	4,000,000		Long-term bonds	1,000,000
Total Assets	$5,240,000		Common stock	1,100,000
			RE	2,580,000
			Total L&E	$5,240,000

Suppose that in 2020 sales increase to $4.6 million and that 2020 dividends will increase to $162,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 8%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2020
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (25%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2020
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Line of credit		$
Accruals		$
Total current liabilities		$
LT bonds		$
Common stock		$
Retained earnings		$
Total L&E		$

Answer 1

Proforma income statement

Sales	$4,600,000
Operating costs	$3,680,000
EBIT	$920,000
Interest	$80,000
Pre-tax earnings	$840,000
Taxes (25%)	$210,000
Net income	$630,000
Dividends	$162,000
Addition to RE:	$468,000

Proforma balance statement

Cash	$184,000
Receivables	$414,000
Inventories	$828,000
Total current liabilities	$1,426,000
Fixes assets	$4,600,000
Total assets	$6,026,000
Accounts payable	$414,000
Line of credit	$234,000
Accruals	$230,000
Total current liabilities	$878,000
LT bonds	$1,000,000
Common stock	$1,100,000
Retained earnings	$3,048,000
Total liabilities and equity	$6,026,000

Growth rate in sales =$4.6 million)4.9 million-1 =15%

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