Chapter 4, Problem 4.21P

Learning Goal 5

P4-21 Integrative: Pro forma statements Provincial Imports Inc. has assembled past (2019) financial statements (income statement and balance sheet below) and financial projections for use in preparing financial plans for the coming year (2020).

Provincial Imports Inc. Income Statement for the Year Ended December 31, 2019

Sales revenue	$5,000,000
Less: Cost of goods sold	2,750,000
Gross profits	$2,250,000
Less: Operating expenses	850,000
Operating profits	$1,400,000
Less: Interest expense	200,000
Net profits before taxes	$1,200,000
Less: Taxes (rate = 40%)	480,000
Net profits after taxes	$ 720,000
Less: Cash dividends	288,000
To retained earnings	$ 432,000

Information related to financial projections for the year 2020 is as follows:

1. 1. Projected sales are $6,000,000.
2. 2. Cost of goods sold in 2019 includes $1,000,000 in fixed costs.
3. 3. Operating expense in 2019 includes $250,000 in fixed costs.
4. 4. Interest expense will remain unchanged
5. 5. The firm will pay cash dividends amounting to 40% of net profits after taxes.
6. 6. Cash and inventories will double.
7. 7. Marketable securities, notes payable, long-term debt, and common stock will remain unchanged.
8. 8. Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales
9. 9. A new computer system costing $356,000 will be purchased during the year. Total depreciation expense for the year will be $110,000.
10. 10. The tax rate will remain at 40%.
11. a. Prepare a pro forma income statement for the year ended December 31, 2020, using the fixed cost data given to improve the accuracy of the percent-of-sales method.
12. b. Prepare a pro forma balance sheet as of December 31, 2020, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account.
13. c. Analyze these statements, and discuss the resulting external financing required.