Financing Deficit Garlington Technologies Inc.\'s 2016 financial statements are
ID: 2786533 • Letter: F
Question
Financing Deficit
Garlington Technologies Inc.'s 2016 financial statements are shown below:
Balance Sheet as of December 31, 2016
Income Statement for December 31, 2016
Suppose that in 2017 sales increase by 5% over 2016 sales and that 2017 dividends will increase to $170,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 11%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.
Explanation / Answer
Year
2016
2017
Sales
$3,600,000
$3,780,000
Operating costs
$3,279,720
$3,443,706
EBIT
$320,280
$336,294
Interest
$18,280
$17,160
Pre-tax earnings
$302,000
$319,134
Taxes (40%)
$120,800
$127,654
Net income
$181,200
$191,480
Dividends
$108,000
$170,000
Addition to RE
$21,480
Operating cost as percentage to sales in 2016 = $3,279,720/$3,600,000 = 0.911033
Operating cost in 2017 = 0.911033 x $3,780,000 = $3,443,706
EBIT = Sales – Operating Cost
Interest = Ending balance of Notes payable in 2016 x 11%
=> $156,000*11% = $17,160
Pre-tax earnings = EBIT – Interest Expense
Taxes = EBIT x 40%
Net Income = Pre-tax earnings - Taxes
Addition to retained earnings = Net Income – Dividends paid
=> $191,480 - $170,000 = $21,480
Pro Forma Balance Sheet:
2016 [A]
Forecasted Percentage Increase (1+5% or 1.05) [B]
Pro forma 2017 [A*B]
Cash
180,000
1.05
189,000
Accounts Receivable
360,000
1.05
378,000
Inventories
720000
1.05
756,000
Total Current Assets
1,260,000
1,323,000
Fixed Assets
1,440,000
1.05
1,512,000
Total Assets
2,700,000
2,835,000
Accounts Payable
360,000
1.05
378,000
Notes Payable
156,000
156,000
Accruals
180,000
1.05
189,000
Total Current Liabilities
696,000
723,000
Common Stock
1,800,000
1,800,000
Retained Earnings
204,000
$225,480.40
Total Liabilities and Equity
2,700,000
2,748,480.40
You can notice that there is a difference between “Total assets” and “Total Liabilities & Equity” in 2017. This is due to the line of credit that is not incorporated as of now. So, the amount raising from Line of credit in 2017 would be $86,519.60 (2,835,000 - 2,748,480.40). This will tally the balance sheet.
Year
2016
2017
Sales
$3,600,000
$3,780,000
Operating costs
$3,279,720
$3,443,706
EBIT
$320,280
$336,294
Interest
$18,280
$17,160
Pre-tax earnings
$302,000
$319,134
Taxes (40%)
$120,800
$127,654
Net income
$181,200
$191,480
Dividends
$108,000
$170,000
Addition to RE
$21,480
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