8. You have just completed the first year of operation for your business and hav
ID: 2715600 • Letter: 8
Question
8. You have just completed the first year of operation for your business and have the following information: sales, $200,000; cost of goods, $140,000; rent, $18,000; utilities, $8,400; insurance, $2,000; equipment, $3,500; and interest, $10,000. Your forecast indicates that your sales will increase by 20 percent. Your rental agreement provides for a 3 percent increase per year. You read an article indicating that utility costs in your area will increase by 10 percent next year. You just received a notice from your insurance company stating your quarterly premium is increasing to $600 beginning the first quarter of next year. Your equipment expense will not change, but the amortization schedule on your current loan indicates that interest expense for next year should be $9,000.
a. Using this data, construct an actual income statement for this year and a pro forma income statement for next year.
b. By what percentage did your net income change?
c. What are your current profit margin and your pro forma profit margin?
d. In your business, assets and liabilities have historically varied with sales. Assets are usually 80 percent of sales, and liabilities are usually 55 percent of sales. You anticipate that you will have no owner payout of net profit. Using the percentage of sales method, determine if any additional financing is needed for your business next year.
Explanation / Answer
a. Actual income statement
Sales
(-) Cost of goods sold
200000
140000
Operating income
(-) Expenses
1) Rent 18000
2) Utilities 8400
3) Equipment 3500
4) Insurance 2000
5) Interest 10000
Total expenses 41900
60000
41900
Net income
18100
A pro forma income statement for next year
Sales ( 200000 + 20%)
(-) Cost of goods sold (NOTE 1)
240000
168000
Operating income
(-) Expenses
1) Rent (18000 + 3%) 18540
2) Utilities (8400 + 10%) 9240
3) Equipment 3500
4) Insurance (NOTE 2) 2400
5) Interest 9000
Total expenses 42680
72000
42680
Net income
29320
(NOTE 1):- As the sales of next year increase, the cost of goods sold also increase. Cost of goods sold over last year sales (140000 /200000) was 70%. Accordingly, for the current year sales of $ 240000 (200000 + 20%), the cost of goods sold will be 70% of 240000 = 168000.
(NOTE 2):- Quarterly premium is increasing to $600 beginning from the first quarter of next year. So there are total 4 quarters in the year, So Total insurance cost in next year will be 2400 (600 * 4).
b. % of change in next year income = 29320 - 18100 / 18100 = 0.6199 i.e., 61.99 % [ Approximately 62%]
C.
Sales
(-) Cost of goods sold
200000
140000
Operating income
(-) Expenses
1) Rent 18000
2) Utilities 8400
3) Equipment 3500
4) Insurance 2000
5) Interest 10000
Total expenses 41900
60000
41900
Net income
18100
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