144 PART 2 Financial Tools

Self-Test Problems (Solutions in Appendix)

LG 1 LG 2 ST4–1 Depreciation and cash flow A firm expects to have earnings before interest and
taxes (EBIT) of $160,000 in each of the next 6 years. It pays annual interest of
$15,000. The firm is considering the purchase of an asset that costs $140,000,
requires $10,000 in installation cost, and has a recovery period of 5 years. It will be
the firm’s only asset, and the asset’s depreciation is already reflected in its EBIT
estimates.
a. Calculate the annual depreciation for the asset purchase using the MACRS
depreciation percentages in Table 4.2 on page 117.
b. Calculate the firm’s operating cash flows for each of the 6 years, using Equation
4.3. Assume that the firm is subject to a 40% tax rate on all the profit that it
earns.
c. Suppose the firm’s net fixed assets, current assets, accounts payable, and accruals
had the following values at the start and end of the final year (year 6). Calculate
the firm’s free cash flow (FCF) for that year.

Year 6 Year 6
Account start end

Net fixed assets $ 7,500 $ 0

Current assets 90,000 110,000
Accounts payable 40,000 45,000
Accruals 8,000 7,000

d. Compare and discuss the significance of each value calculated in parts b and c.

LG 4 LG 5 ST4–2 Cash budget and pro forma balance sheet inputs Jane McDonald, a financial ana-
lyst for Carroll Company, has prepared the following sales and cash disbursement
estimates for the period February–June of the current year.

Cash
Month Sales disbursements

February $500 $400

March 600 300
April 400 600
May 200 500
June 200 200

McDonald notes that historically, 30% of sales have been for cash. Of credit sales,
70% are collected 1 month after the sale, and the remaining 30% are collected
2 months after the sale. The firm wishes to maintain a minimum ending balance in
its cash account of $25. Balances above this amount would be invested in short-term
government securities (marketable securities), whereas any deficits would be
financed through short-term bank borrowing (notes payable). The beginning cash
balance at April 1 is $115.
a. Prepare cash budgets for April, May, and June.
 CHAPTER 4 Cash Flow and Financial Planning 145

b. How much financing, if any, at a maximum would Carroll Company require to

meet its obligations during this 3-month period?
c. A pro forma balance sheet dated at the end of June is to be prepared from the
information presented. Give the size of each of the following: cash, notes
payable, marketable securities, and accounts receivable.

LG 5 ST4–3 Pro forma income statement Euro Designs, Inc., expects sales during 2013 to rise
from the 2012 level of $3.5 million to $3.9 million. Because of a scheduled large
loan payment, the interest expense in 2013 is expected to drop to $325,000. The
firm plans to increase its cash dividend payments during 2013 to $320,000. The
company’s year-end 2012 income statement follows.

Euro Designs, Inc. Income Statement for the

Year Ended December 31, 2012

Sales revenue $3,500,000

Less: Cost of goods sold 1,925,000
Gross profits $1,575,000
Less: Operating expenses 420,000
Operating profits $1,155,000
Less: Interest expense 400,000
Net profits before taxes $ 755,000
Less: Taxes (rate = 40%) 302,000
Net profits after taxes $ 453,000
Less: Cash dividends 250,000
To retained earnings $ 203,000

a. Use the percent-of-sales method to prepare a 2013 pro forma income statement
for Euro Designs, Inc.
b. Explain why the statement may underestimate the company’s actual 2013 pro
forma income.

Warm-Up Exercises All problems are available in .

LG 1 E4–1 The installed cost of a new computerized controller was $65,000. Calculate the
depreciation schedule by year assuming a recovery period of 5 years and using the
appropriate MACRS depreciation percentages given in Table 4.2 on page 117.

LG 2 E4–2 Classify the following changes in each of the accounts as either an inflow or an
outflow of cash. During the year (a) marketable securities increased, (b) land and
buildings decreased, (c) accounts payable increased, (d) vehicles decreased,
(e) accounts receivable increased, and (f) dividends were paid.

LG 2 E4–3 Determine the operating cash flow (OCF) for Kleczka, Inc., based on the following
data. (All values are in thousands of dollars.) During the year the firm had sales of
$2,500, cost of goods sold totaled $1,800, operating expenses totaled $300, and
depreciation expenses were $200. The firm is in the 35% tax bracket.
146 PART 2 Financial Tools

LG 2 E4–4 During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000
and had depreciation of $200,000. It also experienced an increase in current assets
of $150,000 and an increase in accounts payable and accruals of $75,000. If oper-
ating cash flow (OCF) for the year was $700,000, calculate the firm’s free cash flow
(FCF) for the year.

LG 5 E4–5 Rimier Corp. forecasts sales of $650,000 for 2013. Assume the firm has fixed costs
of $250,000 and variable costs amounting to 35% of sales. Operating expenses are
estimated to include fixed costs of $28,000 and a variable portion equal to 7.5% of
sales. Interest expenses for the coming year are estimated to be $20,000. Estimate
Rimier’s net profits before taxes for 2013.

Problems All problems are available in .

LG 1 P4–1 Depreciation On March 20, 2012, Norton Systems acquired two new assets. Asset
A was research equipment costing $17,000 and having a 3-year recovery period.
Asset B was duplicating equipment having an installed cost of $45,000 and a 5-year
recovery period. Using the MACRS depreciation percentages in Table 4.2 on
page 117, prepare a depreciation schedule for each of these assets.

LG 1 P4–2 Depreciation In early 2012, Sosa Enterprises purchased a new machine for
$10,000 to make cork stoppers for wine bottles. The machine has a 3-year recovery
period and is expected to have a salvage value of $2,000. Develop a depreciation
schedule for this asset using the MACRS depreciation percentages in Table 4.2.

LG 1 LG 2 P4–3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments,
Inc., a maker of precision telescopes, expects to report pretax income of $430,000
this year. The company’s financial manager is considering the timing of a purchase
of new computerized lens grinders. The grinders will have an installed cost of
$80,000 and a cost recovery period of 5 years. They will be depreciated using the
MACRS schedule.
a. If the firm purchases the grinders before year-end, what depreciation expense
will it be able to claim this year? (Use Table 4.2 on page 117.)
b. If the firm reduces its reported income by the amount of the depreciation expense
calculated in part a, what tax savings will result?

LG 1 LG 2 P4–4 Depreciation and accounting cash flow A firm in the third year of depreciating its
only asset, which originally cost $180,000 and has a 5-year MACRS recovery
period, has gathered the following data relative to the current year’s operations:

Accruals $ 15,000
Current assets 120,000
Interest expense 15,000
Sales revenue 400,000
Inventory 70,000
Total costs before depreciation, interest, and taxes 290,000
Tax rate on ordinary income 40%
 CHAPTER 4 Cash Flow and Financial Planning 147

a. Use the relevant data to determine the operating cash flow (see Equation 4.2) for
the current year.
b. Explain the impact that depreciation, as well as any other noncash charges, has
on a firm’s cash flows.

LG 2 P4–5 Classifying inflows and outflows of cash Classify each of the following items as an
inflow (I) or an outflow (O) of cash, or as neither (N).

Item Change ($) Item Change ($)

Cash + 100 Accounts receivable - 700

Accounts payable - 1,000 Net profits + 600
Notes payable + 500 Depreciation + 100
Long-term debt - 2,000 Repurchase of stock + 600
Inventory + 200 Cash dividends + 800
Fixed assets + 400 Sale of stock + 1,000

LG 2 P4–6 Finding operating and free cash flows Consider the balance sheets and selected
data from the income statement of Keith Corporation that appear below and on
the next page.

Keith Corporation Balance Sheets

December 31

Assets 2012 2011

Cash $ 1,500 $ 1,000

Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,100
Total assets $23,000 $21,800

Liabilities and Stockholders’ Equity

Accounts payable $ 1,600 $ 1,500

Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholders’ equity $13,400 $12,800
Total liabilities and stockholders’ equity $23,000 $21,800
148 PART 2 Financial Tools

Keith Corporation Income Statement Data (2012)

Depreciation expense $1,600

Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%

a. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended
December 31, 2012, using Equation 4.1.
b. Calculate the firm’s operating cash flow (OCF) for the year ended December 31,
2012, using Equation 4.3.
c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012,
using Equation 4.5.
d. Interpret, compare, and contrast your cash flow estimates in parts b and c.

LG 4 P4–7 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It
expects sales of $70,000 in June and $100,000 in July and in August. Assuming that
sales are the only source of cash inflows and that half of them are for cash and the
remainder are collected evenly over the following 2 months, what are the firm’s
expected cash receipts for June, July, and August?

LG 4 P4–8 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement
schedule for the months of April, May, and June. Use the format of Table 4.9 (on
page 130) and the following information in its preparation.
Sales: February = $500,000; March = $500,000; April = $560,000;
May = $610,000; June = $650,000; July = $650,000
Purchases: Purchases are calculated as 60% of the next month’s sales, 10% of
purchases are made in cash, 50% of purchases are paid for 1 month after pur-
chase, and the remaining 40% of purchases are paid for 2 months after purchase.
Rent: The firm pays rent of $8,000 per month.
Wages and salaries: Base wage and salary costs are fixed at $6,000 per month
plus a variable cost of 7% of the current month’s sales.
Taxes: A tax payment of $54,500 is due in June.
Fixed asset outlays: New equipment costing $75,000 will be bought and paid for
in April.
Interest payments: An interest payment of $30,000 is due in June.
Cash dividends: Dividends of $12,500 will be paid in April.
Principal repayments and retirements: No principal repayments or retirements
are due during these months.

LG 4 P4–9 Cash budget—Basic Grenoble Enterprises had sales of $50,000 in March and
$60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and
$100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes
to maintain a minimum cash balance of $5,000. Given the following data, prepare
and interpret a cash budget for the months of May, June, and July.
(1) The firm makes 20% of sales for cash, 60% are collected in the next month,
and the remaining 20% are collected in the second month following sale.
 CHAPTER 4 Cash Flow and Financial Planning 149

(2) The firm receives other income of $2,000 per month.

(3) The firm’s actual or expected purchases, all made for cash, are $50,000,
$70,000, and $80,000 for the months of May through July, respectively.
(4) Rent is $3,000 per month.
(5) Wages and salaries are 10% of the previous month’s sales.
(6) Cash dividends of $3,000 will be paid in June.
(7) Payment of principal and interest of $4,000 is due in June.
(8) A cash purchase of equipment costing $6,000 is scheduled in July.
(9) Taxes of $6,000 are due in June.
Personal Finance Problem
LG 4 P4–10 Preparation of cash budget Sam and Suzy Sizeman need to prepare a cash budget
for the last quarter of 2013 to make sure they can cover their expenditures during
the period. Sam and Suzy have been preparing budgets for the past several years and
have been able to establish specific percentages for most of their cash outflows.
These percentages are based on their take-home pay (that is, monthly utilities nor-
mally run 5% of monthly take-home pay). The information in the following table
can be used to create their fourth-quarter budget for 2013.

Income
Monthly take-home pay $4,900
Expenses
Housing 30%
Utilities 5%
Food 10%
Transportation 7%
Medical/dental .5%
Clothing for October and November 3%
Clothing for December $440
Property taxes (November only) 11.5%
Appliances 1%
Personal care 2%
Entertainment for October and November 6%
Entertainment for December $1,500
Savings 7.5%
Other 5%
Excess cash 4.5%

a. Prepare a quarterly cash budget for Sam and Suzy covering the months October
through December 2013.
b. Are there individual months that incur a deficit?
c. What is the cumulative cash surplus or deficit by the end of December 2013?

LG 4 P4–11 Cash budget—Advanced The actual sales and purchases for Xenocore, Inc., for
September and October 2012, along with its forecast sales and purchases for the
period November 2012 through April 2013, follow.
The firm makes 20% of all sales for cash and collects on 40% of its sales in
each of the 2 months following the sale. Other cash inflows are expected to be
$12,000 in September and April, $15,000 in January and March, and $27,000 in
February. The firm pays cash for 10% of its purchases. It pays for 50% of its pur-
chases in the following month and for 40% of its purchases 2 months later.
150 PART 2 Financial Tools

Year Month Sales Purchases

2012 September $210,000 $120,000

2012 October 250,000 150,000
2012 November 170,000 140,000
2012 December 160,000 100,000
2013 January 140,000 80,000
2013 February 180,000 110,000
2013 March 200,000 100,000
2013 April 250,000 90,000

Wages and salaries amount to 20% of the preceding month’s sales. Rent of
$20,000 per month must be paid. Interest payments of $10,000 are due in January and
April. A principal payment of $30,000 is also due in April. The firm expects to pay
cash dividends of $20,000 in January and April. Taxes of $80,000 are due in April. The
firm also intends to make a $25,000 cash purchase of fixed assets in December.
a. Assuming that the firm has a cash balance of $22,000 at the beginning of
November, determine the end-of-month cash balances for each month,
November through April.
b. Assuming that the firm wishes to maintain a $15,000 minimum cash balance,
determine the required total financing or excess cash balance for each month,
November through April.
c. If the firm were requesting a line of credit to cover needed financing for the period
November to April, how large would this line have to be? Explain your answer.

LG 4 P4–12 Cash flow concepts The following represent financial transactions that Johnsfield
& Co. will be undertaking in the next planning period. For each transaction, check
the statement or statements that will be affected immediately.

Statement
Pro forma income Pro forma balance
Transaction Cash budget statement sheet

Cash sale

Credit sale

Accounts receivable are collected

Asset with 5-year life is purchased

Depreciation is taken

Amortization of goodwill is taken

Sale of common stock

Retirement of outstanding bonds

Fire insurance premium is paid for the next 3 years

 CHAPTER 4 Cash Flow and Financial Planning 151

LG 4 P4–13 Cash budget—Scenario analysis Trotter Enterprises, Inc., has gathered the fol-
lowing data to plan for its cash requirements and short-term investment opportuni-
ties for October, November, and December. All amounts are shown in thousands of
dollars.

October November December

Pessi- Most Opti- Pessi- Most Opti- Pessi- Most Opti-
mistic likely mistic mistic likely mistic mistic likely mistic

Total cash
receipts $260 $342 $462 $200 $287 $366 $191 $294 $353
Total cash
disbursements 285 326 421 203 261 313 287 332 315

a. Prepare a scenario analysis of Trotter’s cash budget using –$20,000 as the

beginning cash balance for October and a minimum required cash balance of
$18,000.
b. Use the analysis prepared in part a to predict Trotter’s financing needs and
investment opportunities over the months of October, November, and December.
Discuss how knowledge of the timing and amounts involved can aid the planning
process.

LG 4 P4–14 Multiple cash budgets—Scenario analysis Brownstein, Inc., expects sales of

$100,000 during each of the next 3 months. It will make monthly purchases of
$60,000 during this time. Wages and salaries are $10,000 per month plus 5% of
sales. Brownstein expects to make a tax payment of $20,000 in the next month and
a $15,000 purchase of fixed assets in the second month and to receive $8,000 in
cash from the sale of an asset in the third month. All sales and purchases are for
cash. Beginning cash and the minimum cash balance are assumed to be zero.
a. Construct a cash budget for the next 3 months.
b. Brownstein is unsure of the sales levels, but all other figures are certain. If the
most pessimistic sales figure is $80,000 per month and the most optimistic is
$120,000 per month, what are the monthly minimum and maximum ending cash
balances that the firm can expect for each of the 1-month periods?
c. Briefly discuss how the financial manager can use the data in parts a and b to
plan for financing needs.

LG 5 P4–15 Pro forma income statement The marketing department of Metroline Manufac-
turing estimates that its sales in 2013 will be $1.5 million. Interest expense is
expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in
cash dividends during 2013. Metroline Manufacturing’s income statement for the
year ended December 31, 2012, is given on page 152, along with a breakdown of
the firm’s cost of goods sold and operating expenses into their fixed and variable
components.
a. Use the percent-of-sales method to prepare a pro forma income statement for the
year ended December 31, 2013.
b. Use fixed and variable cost data to develop a pro forma income statement for the
year ended December 31, 2013.
c. Compare and contrast the statements developed in parts a and b. Which state-
ment probably provides the better estimate of 2013 income? Explain why.
152 PART 2 Financial Tools

Metroline Manufacturing Metroline Manufacturing

Income Statement Breakdown of Costs and Expenses
for the Year Ended December 31, 2012 into Fixed and Variable Components
for the Year Ended December 31, 2012
Sales revenue $1,400,000
Cost of goods sold
Less: Cost of goods sold 910,000
Fixed cost $210,000
Gross profits $ 490,000
Variable cost 700,000
Less: Operating expenses 120,000
Total costs $910,000
Operating profits $ 370,000
Operating expenses
Less: Interest expense 35,000
Fixed expenses $ 36,000
Net profits before taxes $ 335,000
Variable expenses 84,000
Less: Taxes (rate = 40%) 134,000
Total expenses $120,000
Net profits after taxes $ 201,000
Less: Cash dividends 66,000
To retained earnings $ 135,000

LG 5 P4–16 Pro forma income statement—Scenario analysis Allen Products, Inc., wants to
do a scenario analysis for the coming year. The pessimistic prediction for sales is
$900,000; the most likely amount of sales is $1,125,000; and the optimistic predic-
tion is $1,280,000. Allen’s income statement for the most recent year follows.

Allen Products, Inc. Income Statement for

the Year Ended December 31, 2012

Sales revenue $937,500

Less: Cost of goods sold 421,875
Gross profits $515,625
Less: Operating expenses 234,375
Operating profits $281,250
Less: Interest expense 30,000
Net profits before taxes $251,250
Less: Taxes (rate = 25%) 62,813
Net profits after taxes $188,437

a. Use the percent-of-sales method, the income statement for December 31, 2012,
and the sales revenue estimates to develop pessimistic, most likely, and optimistic
pro forma income statements for the coming year.
b. Explain how the percent-of-sales method could result in an overstatement of
profits for the pessimistic case and an understatement of profits for the most
likely and optimistic cases.
c. Restate the pro forma income statements prepared in part a to incorporate the
following assumptions about the 2012 costs:
$250,000 of the cost of goods sold is fixed; the rest is variable.
$180,000 of the operating expenses is fixed; the rest is variable.
All of the interest expense is fixed.
d. Compare your findings in part c to your findings in part a. Do your observations
confirm your explanation in part b?
 CHAPTER 4 Cash Flow and Financial Planning 153

LG 5 P4–17 Pro forma balance sheet—Basic Leonard Industries wishes to prepare a pro forma
balance sheet for December 31, 2013. The firm expects 2013 sales to total
$3,000,000. The following information has been gathered.
(1) A minimum cash balance of $50,000 is desired.
(2) Marketable securities are expected to remain unchanged.
(3) Accounts receivable represent 10% of sales.
(4) Inventories represent 12% of sales.
(5) A new machine costing $90,000 will be acquired during 2013. Total deprecia-
tion for the year will be $32,000.
(6) Accounts payable represent 14% of sales.
(7) Accruals, other current liabilities, long-term debt, and common stock are
expected to remain unchanged.
(8) The firm’s net profit margin is 4%, and it expects to pay out $70,000 in cash
dividends during 2013.
(9) The December 31, 2012, balance sheet follows.

Leonard Industries Balance Sheet December 31, 2012

Assets Liabilities and Stockholders’ Equity

Cash $ 45,000 Accounts payable $ 395,000

Marketable securities 15,000 Accruals 60,000
Accounts receivable 255,000 Other current liabilities 30,000
Inventories 340,000 Total current liabilities $ 485,000
Total current assets $ 655,000 Long-term debt 350,000
Net fixed assets 600,000 Total liabilities $ 835,000
Total assets $1,255,000 Common stock 200,000
Retained earnings 220,000
Total liabilities and
stockholders’ equity $1,255,000

a. Use the judgmental approach to prepare a pro forma balance sheet dated
December 31, 2013, for Leonard Industries.
b. How much, if any, additional financing will Leonard Industries require in 2013?
Discuss.
c. Could Leonard Industries adjust its planned 2013 dividend to avoid the situation
described in part b? Explain how.

LG 5 P4–18 Pro forma balance sheet Peabody & Peabody has 2012 sales of $10 million. It
wishes to analyze expected performance and financing needs for 2014—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.
154 PART 2 Financial Tools

(3) A minimum cash balance of $480,000 is desired.

(4) A new machine costing $650,000 will be acquired in 2013, and equipment
costing $850,000 will be purchased in 2014. Total depreciation in 2013 is fore-
cast as $290,000, and in 2014 $390,000 of depreciation will be taken.
(5) Accruals are expected to rise to $500,000 by the end of 2014.
(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 2013 and $12 million in 2014.
(10) The December 31, 2012, balance sheet follows.

Peabody & Peabody Balance Sheet December 31, 2012 ($000)

Assets Liabilities and Stockholders’ Equity

Cash $ 400 Accounts payable $1,400

Marketable securities 200 Accruals 400
Accounts receivable 1,200 Other current liabilities 80
Inventories 1,800 Total current liabilities $1,880
Total current assets $3,600 Long-term debt 2,000
Net fixed assets 4,000 Total liabilities $3,880
Total assets $7,600 Common equity 3,720
Total liabilities and
stockholders’ equity $7,600

a. Prepare a pro forma balance sheet dated December 31, 2014.

b. Discuss the financing changes suggested by the statement prepared in part a.

LG 5 P4–19 Integrative—Pro forma statements Red Queen Restaurants wishes to prepare

financial plans. Use the financial statements on page 155 and the other information
provided below to prepare the financial plans.
The following financial data are also available:
(1) The firm has estimated that its sales for 2013 will be $900,000.
(2) The firm expects to pay $35,000 in cash dividends in 2013.
(3) The firm wishes to maintain a minimum cash balance of $30,000.
(4) Accounts receivable represent approximately 18% of annual sales.
(5) The firm’s ending inventory will change directly with changes in sales in 2013.
(6) A new machine costing $42,000 will be purchased in 2013. Total depreciation
for 2013 will be $17,000.
(7) Accounts payable will change directly in response to changes in sales in 2013.
(8) Taxes payable will equal one-fourth of the tax liability on the pro forma income
statement.
(9) Marketable securities, other current liabilities, long-term debt, and common
stock will remain unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2013,
using the percent-of-sales method.
b. Prepare a pro forma balance sheet dated December 31, 2013, using the
judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required.
 CHAPTER 4 Cash Flow and Financial Planning 155

Red Queen Restaurants Income Statement

for the Year Ended December 31, 2012

Sales revenue $800,000

Less: Cost of goods sold 600,000
Gross profits $200,000
Less: Operating expenses 100,000
Net profits before taxes $100,000
Less: Taxes (rate = 40%) 40,000
Net profits after taxes $ 60,000
Less: Cash dividends 20,000
To retained earnings $ 40,000

Red Queen Restaurants Balance Sheet December 31, 2012

Assets Liabilities and Stockholders’ Equity

Cash $ 32,000 Accounts payable $100,000

Marketable securities 18,000 Taxes payable 20,000
Accounts receivable 150,000 Other current liabilities 5,000
Inventories 100,000 Total current liabilities $125,000
Total current assets $300,000 Long-term debt 200,000
Net fixed assets 350,000 Total liabilities $325,000
Total assets $650,000 Common stock 150,000
Retained earnings 175,000
Total liabilities and
stockholders’ equity $650,000

LG 5 P4–20 Integrative—Pro forma statements Provincial Imports, Inc., has assembled past
(2012) financial statements (income statement below and balance sheet on
page 156) and financial projections for use in preparing financial plans for the
coming year (2013).

Provincial Imports, Inc. Income Statement

for the Year Ended December 31, 2012

Sales revenue $5,000,000

Less: Cost of goods sold 2,750,000
Gross profits $2,250,000
Less: Operating expenses 850,000
Operating profits $1,400,000
Less: Interest expense 200,000
Net profits before taxes $1,200,000
Less: Taxes (rate = 40%) 480,000
Net profits after taxes $ 720,000
Less: Cash dividends 288,000
To retained earnings $ 432,000