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# Percentage of Sales Method

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ALPHA Inc. has provided you with the following financial data for the year ended December 31, 2006. A major creditor has asked for pro forma financial statements for the year ending December 31, 2007.
Accounts payable \$45500
Accounts receivable 60000
Accumulated depreciation 590000
Cash 1500
Common stock 71000
Cost of goods sold 195000
Depreciation expense 10000
Interest expense 12000
Inventory 95000
Long-term debt 55000
Notes payable 55000
Plant and equipment 740000
Retained earnings 75000
Sales 300000
Selling expense 40000
Wages payable 5000

Prepare the pro forma income statement and balance sheet for the year ending December 31, 2007, using the percent-of-sales method and the additional information that follows.
- 2007 sales are expected to be 10% higher than those of 2006
- Accounts receivable represent 20% of sales in both years
- A minimum cash balance of \$1650 is maintained
- Inventory represents 32% of sales
- Plant and equipment outlays in 2007 are \$20000
- Total depreciation expense for 2007 will be \$15000
- Accounts payable represents 15% of sales
- Notes and wages payable will remain he same
- No long-tern debt will be retired in 2007
- No common stock will be issued or repurchased in 2007
- The firm will pay dividends equal to 50% of its earnings after taxes
- The firm uses a tax rate of 40% for all of its pro forma work
What is the firm's quick ratio at December 31, 2007, expected to be?

#### Solution Preview

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ALPHA Inc. has provided you with the following financial data for the year ended December 31, 2006. A major creditor has asked for pro forma financial statements for the year ending December 31, 2007.
Accounts payable \$45500
Accounts receivable 60000
Accumulated depreciation 590000
Cash 1500
Common stock 71000
Cost of goods sold ...

#### Solution Summary

The solution explains the percentage of sales method to prepare pro forma income statement and balance sheet.

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