Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has made several assumptions, which are shown below:Lamont has projected the firm's sales will be $1 million in the first year.She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively.For working capital, Lamont has estimated the following:Accounts receivable as a percentage of sales: 12%Inventory as a percentage of sales: 15%Accounts payable as a percentage of sales: 7%Accruals as a percentage of sales: 5%A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate.The firm's tax rate will be 30 percent.Lamont will need to purchase $350,000 in plant and equipment.Lamont will provide any other financing needed.Based on Lamont's assumptions in Situation 3, prepare a pro forma income statement and balance sheet.

Income Statement Year 1 Particulars Amount Sales $1000000 Less: Cost of goods sold 500000 Gross Profit $500000 Less: operating costs 300000 Operating Profits $200000 Less: Interest (600000*8%) 48000 Income before tax $152000 Less: Taxes @ 30% 45600 Net Income $106400Balance Sheet At the end of Year 1 Liabilities Amount Assets Amount Accounts payable $35000 Cash $146400 Accruals 25000 Accounts receivables (12% x 1,000,000) 120000 Short term Loan 100000 Inventory (15% x 1,000,000) 150000 Current Liabilities 160000 Current Assets 416400 Long term Loans 500000 Plant and equipment 350000 Retained earnings 106400 Total Liabilities $766400 Total Assets $766400

Answered: Karen Lamont is in the process of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has made several assumptions, which are shown below:

Lamont has projected the firm's sales will be $1 million in the first year.
She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively.
For working capital, Lamont has estimated the following:
- Accounts receivable as a percentage of sales: 12%
- Inventory as a percentage of sales: 15%
- Accounts payable as a percentage of sales: 7%
- Accruals as a percentage of sales: 5%
A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate.
The firm's tax rate will be 30 percent.
Lamont will need to purchase $350,000 in plant and equipment.

Lamont will provide any other financing needed.

Based on Lamont's assumptions in Situation 3, prepare a pro forma income statement and balance sheet.

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