Chapter 4, Problem 4.19P

Learning Goal 5

P4-19 Pro forma balance sheet Peabody & Peabody has 2019 sales of $10 million. It wishes to analyze expected performance and financing needs for 2021, which is 2 years ahead. Given the following information, respond to parts a and b.

1. 1. The percent of sales for items that vary directly with sales are as follows:

  Accounts receivable, 12%

  Inventory, 18%

  Accounts payable, 14%

  Net profit margin, 3%

1. 2. Marketable securities and other current liabilities are expected to remain unchanged.
2. 3. A minimum cash balance of $480,000 is desired.
3. 4. A new machine costing $650,000 will be acquired in 2020, and equipment costing $850,000 will be purchased in 2021. Total depreciation in 2020 is forecast as $290,000, and in 2021 $390,000 of depreciation will be taken.
4. 5. Accruals are expected to rise to $500,000 by the end of 2021.
5. 6. No sale or retirement of long-term debt is expected.
6. 7. No sale or repurchase of common stock is expected.
7. 8. The dividend payout of 50% of net profits is expected to continue.
8. 9. Sales are expected to be $11 million in 2020 and $12 million in 2021.
9. 10. The December 31, 2019, balance sheet follows.

1. a. Prepare a pro forma balance sheet dated December 31, 2021.
2. b. Discuss the financing changes suggested by the statement prepared in part a.