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    Pro Forma Balance Sheet

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    P3-14 Pro forma balance sheet Peabody & Peabody has 2006 sales of $10 million. It wishes to analyze expected performance and financing needs for 2008-2 years ahead. Given the following information, respond to parts a and b.

    (1) The percents of sales for items that vary directly with sales are
    as follows:
    Accounts receivable, 12%
    Inventory, 18%
    Accounts payable, 14%
    Net profit margin, 3%
    (2) Marketable securities and other current liabilities are expected to remain
    unchanged.
    (3) A minimum cash balance of $480,000 is desired.
    (4) A new machine costing $650,000 will be acquired in 2007, and equipment
    costing $850,000 will be purchased in 2008. Total depreciation in 2007
    is forecast as $290,000, and in 2008 $390,000 of depreciation will
    be taken.
    (5) Accruals are expected to rise to $500,000 by the end of 2008.
    (6) No sale or retirement of long-term debt is expected.
    (7) No sale or repurchase of common stock is expected.
    (8) The dividend payout of 50% of net profits is expected to continue.
    (9) Sales are expected to be $11 million in 2007 and $12 million in 2008.
    (10) The December 31, 2006, balance sheet is given below.
    LG5

    a. Prepare a pro forma balance sheet dated December 31, 2008.
    b. Discuss the financing changes suggested by the statement prepared in

    part a.
    Peabody & Peabody
    Balance Sheet
    December 31, 2006
    ($000)
    Assets Liabilities and Stockholders' Equity
    Cash $ 400 Accounts payable $1,400
    Marketable securities 200 Accruals 400
    Accounts receivable 1,200 Other current liabilities
    Inventories Total current liabilities $1,880
    Total current assets $3,600 Long-term debt $2,000
    Net fixed assets Common equity
    Total assets Total liabilities and
    stockholders' equity $7,600
    $7,600
    $4,000 $3,720
    1,800
    80
    INTERMEDIATE
    Principles

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