The balance sheet of the Thompson Trucking Company (TTC) follows: TTC has sales
ID: 2744385 • Letter: T
Question
The balance sheet of the Thompson Trucking Company (TTC) follows: TTC has sales for the year ended 12/31/2013 of $49.76 million. The firm follows a policy of paying all the earnings out to its common stockholders in cash dividends. Thus, TTC generated no funds from its earnings that can be used to expand its operations. (Assume that the depreciation expense is just equal to the cost of replacing worn-out assts.). Hint: Make sure to round all intermediate calculations to at least five decimal places.
A. If TTC anticipates sales of $79.57 million during the coming year, develop a pro forma balance sheet for the firm for 12/31/201. Assume the current assets vary as a percent of sales, net fixed assets remain unchanged, and the accounts payable vary as a percent of sales. Use notes payable as a balancing entry.
B. How much "new" financing will TTC need next year?
C. What limitation does the percent-of-sales forecast method suffer from? Discuss briefly
Thompson Trucking Company Balance Sheet, December 31, 2010 (in millions)
Current Assets
$10.17
Accounts Payable
$4.71
Net Fixed Assets
$15.09
Notes Payable
0.00
Total
$25.26
Bonds Payable
$9.94
Common Equity
$10.61
Total
$25.26
Thompson Trucking Company Balance Sheet, December 31, 2010 (in millions)
Current Assets
$10.17
Accounts Payable
$4.71
Net Fixed Assets
$15.09
Notes Payable
0.00
Total
$25.26
Bonds Payable
$9.94
Common Equity
$10.61
Total
$25.26
Explanation / Answer
A. Thompson Trucking Company
Proforma Balance Sheet
December 31, 2011
B. TTC will need $ 3.27 million in new financing next year
C. The percent-of-sales forecast method suffers from the circularity proble. This problem arises from the fact that the proforma income statement and the proforma balance sheet are interrelated. The balance sheet cannot be prepared unless the income statement is prepared, showing the amount of retained earnings to be carried to the balance sheet is ready. Similarly, without the proforma balance sheet, the interest expense associated with the amount of external financing ( an important item in the pro forma income statement) cannot be figured out.
Another limitation follows from the underlying assumption that the future relationship between various elements of cost to sales will be the same as the historical relationship.
Current Assets $ 16.26 Accounts Payable $7.53 Net Fixed Assets $ 15.09 Notes Payable $ 3.27 Bonds Payable $ 9.94 Common Equity $ 10.61 $ 31.35 $ 31.35Related Questions
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