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Pro forma financial statements

15-6 Review the following 2009 balance sheet and income statement for T. F. Baker Cosmetics, Inc. The numerical values are in thousands of dollars.

T.F. Baker Cosmetics, Inc.

Balance Sheet

Cash $ 5,000 Accounts payable $10,000
Accounts receivable 12,500 Short-term bank loan 15,000
Inventory 10,000 Long-term debt 10,000
Current assets $27,000 Common stock 15,000
Gross fixed assets $65,000 Retained earnings 12,500
Less: accum. depr. 30,000 Total liabilities and equity $62,500
Net fixed assets $35,000
Total assets $62,500

T.F. Baker Cosmetics, Inc.

Income Statement

Sales $150,000
Less: Cost of goods sold 120,000
Gross profit $ 30,000
Less: Operating expenses 15,000
Less: Depreciation 5,000
Less: Interest 2,000
Pretax profit $ 8,000
Less: Taxes (35%) 2,800
Net Income $ 5,200

At a recent board meeting, the firm set the following objectives for 2010:

1. The firm would increase liquidity. For competitive reasons, accounts receivable and inventory balances were expected to continue their historical relationships with sales and cost of goods sold, respectively, but the Board felt that the company should double its cash holdings.

2. The firm would accelerate payments to suppliers. This would have two effects. First, by paying more rapidly, the firm would be able to take advantage of early payment discounts, which would increase its gross margin from 20 percent to 22 percent. Second, by paying earlier, the firmâ??s accounts payable balance, which historically averaged about one twelfth of cost of goods sold, would decline to 4 percent of cost of goods sold.

3. The firm would expand its warehouse, which would require an investment in fixed assets of $10 million. This would increase projected depreciation expense from $5 million in 2009 to $7 million in 2010.

4. The firm would issue no new common stock during the year, and it would initiate a dividend payments in 2010 would total $1.2 million.

5. Operating expenses would remain at 10 percent of sales.

6. The firm did not expect to retire any long-term debt, and it was willing to borrow up to the limit of its current credit line with the bank, $20 million. The interest rate on its outstanding debts would average 8 percent.

7. The firm set a sales target for 2010 of $200 million.

Develop a set of pro forma financial statements to determine whether or not T.F. Baker Cosmetics can achieve all these goals simultaneously.

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The solution explains how to prepare pro forma financial statements incorporating the given assumptions

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