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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.