Chapter 4, Problem 4.20P

Learning Goal 5

P4-20 Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans. The following financial data are also available:

1. 1. The firm has estimated that its sales for 2020 will be $900,000.
2. 2. The firm expects to pay $35,000 in cash dividends in 2020.
3. 3. The firm wishes to maintain a minimum cash balance of $30,000.
4. 4. Accounts receivable represent approximately 18% of annual sales.
5. 5. The firm's ending inventory will change directly with changes in sales in 2020.
6. 6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.
7. 7. Accounts payable will change directly in response to changes in sales in 2020.
8. 8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
9. 9. Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.
10. a. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.
11. b. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.
12. c. Analyze these statements, and discuss the resulting external financing required.

Red Queen Restaurants Income Statement for the Year Ended December 31 2019

Sales revenue	$800,000
Less: Cost of goods sold	600,000
Gross profits	$200,000
Less: Operating expenses	100,000
Net profits before taxes	$100,000
Less: Taxes (rate = 40%)	40,000
Net profits after taxes	$60,000
Less: Cash dividends	20,000
To retained earnings	$40.000