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    Pro forma financial statements

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    Below are the pro forma financial statements for 2010 of your company. The owners of the company have grown sales by having a very generous credit policy. The yearend A/R balance will be $2,500,000 which is about 90 days of sales. There will also be a Notes Payable bank loan of $1,900,000 outstanding at the end of the year. The company's banker said it would be very difficult for the bank to lend the company that much, because the company is acting like a bank by financing customers' purchases.

    The owner would like to see how changing the credit policy would affect the need for a loan. They would like to lower the year end A/R balance to 45 days of sales. The owners realize this will cause the sales to fall. They predict the sales will fall 4% to $9.6 million for the year. GA&S, fixed assets, long term debt, common stock and depreciation will not change. Inventory, cost of goods sold, and A/P will remain the same percent of sales under either plan. The tax rate is 30%. The minimum cash balance is $250,000.

    Pro form income statement for 2010 (in thousands)
    Sales 10,000
    COGS 6,400
    GM 3,600
    GA&S 1,600
    Dep 400
    Int 250
    Taxable income 1,350
    Tax 405
    Net income 945

    Pro forma balance sheet as of Dec 31, 2010
    Cash 250
    A/R 2,500
    Inv 1,600
    TCA 4,350
    FA 12,000
    Acc. Dep 4,800
    NFA 7,200
    TA 11,550

    A/P 200
    N/P 1,900
    TCL 2,100

    LTD 1,225
    CS 1,000
    RE 7,225
    TL&E 11,550

    Create a new pro forma for 2010 using the new credit policy with the lower sales estimate.

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    Solution Summary

    The solution explains how to prepare a new pro forma for 2010 using the new credit policy with the lower sales estimate.