Suppose 2014 sales are projected to increase by 10% over 2013 sales. Use the for

Question

Suppose 2014 sales are projected to increase by 10% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 6%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations.

What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.

Notes payable     $   

Total assets $    AFN $    Stevens Textile's 2013 financial statements are shown below: Balance Sheet as of December 31, 2013 (Thousands of Dollars) Cash 1,080 Accounts payable Receivables 6,480 Accruals Inventories 9,000 Line of credit Total current assets $16,560 Notes payable 12,600 Total current liabilities Net fixed assets Mortgage bonds Common stock Retained earnings Total assets $29,160 Total liabilities and equity Income Statement for December 31, 2013 (Thousands of Dollars) Sales $36,000 32,440 Operating costs 3,560 Earnings before interest and taxes 460 Interest Pre-tax earnings 3,100 1,240 Taxes (40%) 1,860 Net income 837 Dividends (45%) 1,023 Addition to retained earnings 4,320 2,880 2,100 9,300 3,500 3,500 12,860 $29,160

Explanation / Answer

PRO FORMA INCOME STATEMENTS FOR DECEMBER 2014

PROFORMA BALANCE SHEET

Note:

1. Interest expense @ 6% for 2014 has been calculated on notes payable + mortgage bonds , i.e 2,100 + 3,500

2. Net fixed assets have also increased proportionately by 10%.

3. Since it is mentioned in the problem that any additional debt will come in the form of a line of credit, notes payable has been left unchanged.

Actual 2013 Forecasted 2014 Sales 36,000 39,600 Cost of goods sold 32,440 35,684 Earnings before interest and taxes 3,560 3,916 Interest expense 460 336 Pre-tax earnings 3,100 3,580 Taxes @ 40% 1,240 1,432 Net income 1,860 2,148 Dividends @ 45% 837 967 Addition to retained earnings 1,023 1,181

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