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    Proforma Financial Statements for Stevens Textiles

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    This problem requires creating a pro-forma balance sheet to come up with the answers. I have placed the answers from the back of the book in the spreadsheet, but I don't know how to come up with them (i.e. create the sheet).

    Stevens Textile's 2004 financial statements are shown below.

    Stevens Textile's: Balance sheet as of December 31, 2004
    (Thousands of Dollars)

    Cash $1,080 Accounts Payable $4,320
    Receivables $6,480 Accrurals $2,880
    Inventories $9,000 Notes Payable $2,100

    Total current assets $16,560 Total current liabilities $9,300
    Net fixed assets $12,600 Mortgage bonds $3,500
    Common stock $3,500
    Total assets $29,160 Retained earnings $12,860

    Total liabilities and equity $29,160

    Stevens Textile's: Income Statement as of December 31, 2004
    (Thousands of Dollars)

    Sales $36,000
    Operating Costs $32,440

    Earnings before Interest $3,560
    Interest $460

    Earnings before taxes $3,100
    Taxes $1,240

    Net Income $1,860
    Dividends $837
    Addition to retained earnings $1,023

    Suppose 2005 sales are projected to increase by 15 percent over 2004 sales. Determine the additional funds needed.
    Assume that the company was operating at full capacity in 2004, that it cannot sell off any of its fixt assets, and that any
    required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are
    expected to increase by the same percentage as sales. Use the percent of sales method to develop a pro forma balance sheet
    and income statement for December 31, 2005. Use an interest rate of 10 percent on the balance debt at the beginning of the year
    to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.

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    Solution Preview

    In solving such a problem, the steps are

    1. Get the expenses as a % of sale. Operating costs are 90% of sale.
    2. Make the profirma income statement - increase sales by 15%. Operating costs are 90% of the new sales value.
    3. Interest is given as 10% of the opening debt. Add up notes payable and mortgage bonds. 10% of ...

    Solution Summary

    The solution explains how the prepare proforma financial statements using the percentage of sales method