Question

FORECASTING FINANCIAL STATEMENTS - Company A reported an income statement and balance sheet as shown below:...

FORECASTING FINANCIAL STATEMENTS -

Company A reported an income statement and balance sheet as shown below:

Company A
Income Statement
For the Years Ended
2017
Sales 550.00
Cost of sales 275.00
Gross profit 275.00
SG&A 55.00
Depreciation 60.00
Interest 14.47
Pretax income 145.53
Tax 43.66
Net income 101.87
Company A
Balance Sheet
As of
2017
Cash 60.00
Accounts receivable 5.00
Inventory 8.00
Total current assets 73.00
PP&E - gross 600.00
Accumulated depreciation 200.00
PP&E - net 400.00
Total assets 473.00
Accounts payable 20.00
Other current liabilities 10.00
Total current liabilities 30.00
Notes payable 241.13
Total liabilities 271.13
Common stock 100.00
Retained earnings 101.87
Total equity 201.87
Total liabilities and equity 473.00

Use the following assumptions to forecast pro-forma income statement and balance sheets for a 5-year period and a terminal year: (PLEASE SHOW FORMULAS USED TO SOLVE PROBLEM)

(a) Sales increase to $825 in the first year and then increase 20 percent the second year, 15 percent the third year, 10 percent in the fourth year, and 7 percent in the fifth year. Terminal year increases at the assumed growth rate of 4 percent.

(b) Cost of sales is 35 percent of sales.

(c) Sales, general, and administrative expenses are 15 percent of sales.

(d) Depreciation is 8 percent of gross end-of-year property, plant, and equipment.

(e) Interest expense is 5 percent of end-of-year notes payable.

(f) Tax expense is 35 percent of pretax income.

(g) Cash is equal to three month's cost of sales (use current year costs of sales divided by 4).

(h) Accounts receivable has a turnover ratio of 9.0.

(i) Inventory has a turnover ratio of 4.0

(j) Gross property, plant, and equipment gross at the same rate as sales.

(k) Accumulated depreciation increases in Years 1 through 5 by the amount of the current year depreciation. Accumulated depreciation in the terminal year is equal to $711.36

(l) Accounts payable has a turnover ratio of 6.0

(m) Other current liabilities are $35 in Year 1, increasing by $10 in each of Year 2 thorugh 5, and equal to $78.00 in the terminal year.

(n) Notes payable are $498.94 in Year 1, $521.48 in Year 2, $493,56 in Year 3, $401.47 in Year 4, $264.22 in Year 5, and $274.79 in the terminal year

(o) Common stock is remains at $100 in Years 1 through 5, increasing to $104 in the terminal year.

(p) Retained earnings increases by the current year net income less dividends of $125 in Year 1, $150.01 in Year 2, $174.99 in Year 3, $200.01 in Year 4, $224.99 in Year 5, and $339.19 in the terminal year.

q) The depreciation add back in the operating cash flow section of the statement of cash flows is equal to the change in accumulated depreciation for the year.

Homework Answers

Answer #1
Company A
Income Statement
For the Years Ended
2017 2018 2019 2020 2021 2022 Terminal year 2023
Sales     550.00            825.00               990.00                  1,138.50                    1,252.35                    1,340.01                        1,393.62
                1.50 (825*120%) (990*115%) (1138.50*110%) (1252.35*107%) (1340.01*104%)
Cost of Sales     275.00            288.75               346.50                     398.48                        438.32                        469.01                            487.77
(825*35%) (990*35%) (1138.50*35%) (1252.35*35%) (1340.01*35%) (1393.62*35%)
Gross Profit     275.00            536.25               643.50                     740.03                        814.03                        871.01                            905.85
SG&A       55.00            123.75               148.50                     170.78                        187.85                        201.00                            209.04
(825*15%) (990*15%) (1138.50*15%) (1252.35*15%) (1340.01*15%) (1393.62*15%)
Depreciation       60.00              72.00                 86.40                        99.36                        109.30                        116.95                              27.36
(900*8%) (1080*8%) (1242*8%) (1366.2*8%) (1461.83*8%) (711.36-684)
Interest       14.47              24.95                 26.07                        24.68                          20.07                          13.21                              13.74
(498.94*5%) (521.48*5%) (493.56*5%) (401.47*5%) (264.22*5%) (274.79*5%)
Pretax Income     145.53            315.55               382.53                     445.21                        496.81                        539.85                            655.71
Tax       43.66            110.44               133.88                     155.82                        173.88                        188.95                            229.50
(35% of Pretax Income)
Net Income     101.87            205.11               248.64                     289.39                        322.92                        350.90                            426.21
Company A
Balance sheet
As of
2017 2018 2019 2020 2021 2022 Terminal year 2023
Cash       60.00                 72.19                 86.63                    99.62                 109.58                        117.25                            183.21
(288.75/4) (346.50/4) (398.48/4) (438.32/4) (469.01/4) balancing figure
Accounts Receivable         5.00                 91.67               110.00                 126.50                 139.15                        148.89                            154.85
(825/9) (990/9) (1138.5/9) (1252.35/9) (1340.01/9) (1393.62/9)
Inventory         8.00                 72.19                 86.63                    99.62                 109.58                        117.25                            121.94
(288.75/4) (346.50/4) (398.48/4) (438.32/4) (469.01/4) (487.77/4)
Total Current Assets       73.00               236.04               283.25                 325.74                 358.31                        383.39                            460.00
PP&E - gross     600.00               900.00           1,080.00              1,242.00              1,366.20                    1,461.83                        1,520.31
(600*150%) (900*120%) (1080*115%) (1242*110%) (1366.20*107%) (1461.83*104%)
Accumulated Depreciation     200.00               272.00               358.40                 457.76                 567.06                        684.00                            711.36
(200+72) (272+86.4) (358.40+99.36) (457.76+109.30) (+567.06+116.95) given
PP&E - net     400.00               628.00               721.60                 784.24                 799.14                        777.83                            808.95
Total Assets     473.00               864.04           1,004.85              1,109.98              1,157.46                    1,161.22                        1,268.95
Accounts Payable       20.00                 48.13                 57.75                    66.41                    73.05                          78.17                              81.29
(288.75/6) (346.50/6) (398.48/6) (438.32/6) (469.01/6) (487.77/6)
Other Current Liabilities       10.00                 35.00                 45.00                    55.00                    65.00                          75.00                              78.00
given (35+10) (45+10) (55+10) (65+10) given
Total Current Liabilities       30.00                 83.13               102.75                 121.41                 138.05                        153.17                            159.29
Notes Payable     241.13               498.94               521.48                 493.56                 401.47                        264.22                            274.79
Total Liabilities     271.13               582.07               624.23                 614.97                 539.52                        417.39                            434.08
Common Stock     100.00               100.00               100.00                 100.00                 100.00                        100.00                            104.00
Retained Earnings     101.87               181.98               280.61                 395.01                 517.92                        643.83                            730.86
Total Equity     201.87               281.98               380.61                 495.01                 617.92                        743.83                            834.86
Total Liabilities and Equity     473.00               864.04           1,004.84              1,109.98              1,157.45                    1,161.22                        1,268.94
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