Red Queen Restaurants wishes to prepare financial plans. Use the financial state

Question

Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.

The following financial data are also available:

(1) The firm has estimated that its sales for 2016 will be $900,000.

(2) The firm expects to pay $35,000 in cash dividends in 2016.

(3) The firm wishes to maintain a minimum cash balance of $30,000.

(4) Accounts receivable represent approximately 18% of annual sales.

(5) The firm’s ending inventory will change directly with changes in sales in 2016.

(6) A new machine costing $42,000 will be purchased in 2016. Total depreciation for 2016 will be $17,000.

(7) Accounts payable will change directly in response to changes in sales in 2016.

(8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.

(9) Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.

Required

a. Prepare a pro forma income statement for the year ended December 31, 2016, using the percent-of-sales method.

b. Prepare a pro forma balance sheet dated December 31, 2016, using the judgmental approach.

c. Analyze these statements, and discuss the resulting external financing required.

Explanation / Answer

Proforma Income Statement:

Increase in Sales = 100,000 / 800,000 = 12.50%

Amount($) Sales Revenue 900,000 Less: Cost of Goods sold 675,000 Gross Profit 225,000 Less: Operating Expenses 112,500 Net Profit before Tax 112,500 Less: Tax 40% 45,000 Net Profit after Tax 67,500 Less: Cash Dividend 35,000 To Retained Earnings 32,500

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