The Nautical Co. Ltd. expects sales of $2.4 mill this year and the same amount t

Question

The Nautical Co. Ltd. expects sales of $2.4 mill this year and the same amount the following year. All sales are on credit and are spread evenly throughout the year. On the basis of the following information, prepare a forecast income statement and balance sheet for year ended December 31st, 2017.

• Cash : Minimum of 4 percent of annual sales

• Accounts Receivable : 60 day average collection based on annual sales.

• Inventories : Turnover of eight times a year.

• Net Fixed Assets : $500,000 now. Capital expenditure equal to depreciation.

• Accounts Payable : One month’s purchases.

• Accrued expenses : 3 percent of sales.

• Bank borrowing : $50,000 now. Can borrow as much as $250,000.

• Long Term Debt : $300,000 now; payable balance $75,000 at year end.

• Common Stock : $100,000. No addition planned.

• Retained Earnings : $500,000 now ( the opening balance ).

• Net profit margin : 8% of sales

• Dividends : None

• Cost of Goods Sold : 60% of sales.

• Purchases : 50% of cost of goods sold.

• Income Taxes : 50% of before tax profits.

Explanation / Answer

The income statement is given as follows:

_________

The balance sheet is given as follows:

Notes:

The value of bank borrowing is calculated as follows;

Bank Borrowing = Total Assets - Accounts Payable - Accrued Expenses - Long Term Debt - Total Stockholder's Equity = 1,176,000 - 60,000 - 72,000 - 225,000 - 792,000 = $27,000

Sales 2,400,000 Less Cost of Goods Sold (2,400,000*60%) 1,440,000 Gross Profit 960,000 Less Expenses (960,000 – 384,000) 576,000 Profit Before Taxes (192,000/50%) 384,000 Less Taxes (384,000*50%) 192,000 Net Income (8%*2,400,000) $192,000 Less Dividends 0 Increase in Retained Earnings $192,000

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