Integrative—Pro forma statements Provincial Imports, Inc

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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

Information related to financial projections for the year 2013:

 

	Provincial Imports, Inc. Balance Sheet
	December 31, 2012
Assets	Liabilities and Stockholders’ Equity
Cash	$ 200,000	Accounts payable	$ 700,000
Marketable securities	225,000	Taxes payable	95,000
Accounts receivable	625,000	Notes payable	200,000
Inventories	500,000	Other current liabilities	5,000
Total current assets	$1,600,000	Total current liabilities	$1,000,000
Net fixed assets	1,400,000	Long-term debt	500,000
Total assets	$2,950,000	Total liabilities	$1,500,000
		Common stock	75,000
		Retained earnings	1,375,000
		Total liabilities and equity	$2,950,000

(1) Projected sales are $6,000,000.

(2) Cost of goods sold in 2012 includes $1,000,000 in fixed costs.

(3) Operating expense in 2012 includes $250,000 in fixed costs.

(4) Interest expense will remain unchanged.

(5) The firm will pay cash dividends amounting to 40% of net profits after taxes.

(6) Cash and inventories will double.

(7) Marketable securities, notes payable, long-term debt, and common stock will remain unchanged.

(8) Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales.

(9) A new computer system costing $356,000 will be purchased during the year. Total depreciation expense for the year will be $110,000.

(10) The tax rate will remain at 40%.

a. Prepare a pro forma income statement for the year ended December 31, 2013, using the fixed cost data given to improve the accuracy of the percent-of-sales method.

b. Prepare a pro forma balance sheet as of December 31, 2013, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account.

c. Analyze these statements, and discuss the resulting external financing required.