Red Queen Restaurants wishes to prepare financial plans. Use the financial state
ID: 2497908 • Letter: R
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-ofsales
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.
Red Queens Restaurants Income Statement for the Year Ended December 31, 2015
Sales revenue
$ 800,000
Less: Cost of goods sold
600,000
Gross profit
200,000
Less: Operating expenses
100,000
Net Profits before taxes
$ 100,000
Less: taxes (rate= 40%)
40,000
Net profits after taxes
$ 60,000
Less: Cash dividends
20,000
To retained earnings
$ 40,000
Red Queens Restaurant Balance Sheet December 31, 2015
Assets
Liabilities and Stockholders' equity
Cash
$ 32,000
Accounts payable
$ 100,000
Marketable securities
18,000
Taxes payable
20,000
Accounts receivable
150,000
Other current liabilities
5,000
Inventories
100,000
Total current liabilities
125,000
Total current assets
300,000
Long-term debt
200,000
Net fixed assets
350,000
Total liabilities
325,000
Total assets
650,000
Common stocks
150,000
Retained earnings
175,000
Total liabilities and stockholders' equity
650,000
Red Queens Restaurants Income Statement for the Year Ended December 31, 2015
Sales revenue
$ 800,000
Less: Cost of goods sold
600,000
Gross profit
200,000
Less: Operating expenses
100,000
Net Profits before taxes
$ 100,000
Less: taxes (rate= 40%)
40,000
Net profits after taxes
$ 60,000
Less: Cash dividends
20,000
To retained earnings
$ 40,000
Explanation / Answer
Answer:
(c) External financing of $11,250 is required as shown in point (b).
Red Queens Restaurants Income Statement for the Year Ended December 31, 2015 Amount $ % of Sales Sales revenue 800,000 Less: Cost of goods sold 600,000 75.00% Gross profit 200,000 25.00% Less: Operating expenses 100,000 12.50% Net Profits before taxes 100,000 12.50% Less: Tax 40,000 Net profits after taxes 60,000 Cash Dividend 20,000 Retained Earning 40,000Related Questions
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