Problem:
Balance Sheet as of 12-31-2004
(Thousands of Dollars)
Assets
Cash $ 1,080
Receivables 6,480
Inventories 9,000
Total current assets $ 16,560
Net fixed assets 12,600
Total assets $29,160
Liabilities
Accounts payable $ 4,320
Accruals 2,880
Notes payable 2,100
Total current liabilities $ 9,300
Mortgage bonds 3,500
Common stock 3,500
Retained earnings 12,860
Total current liabilities and equity $29,160
Income Statement for 12-31-2004
(Thousands of Dollars)
Sales $36,000
Operating costs 32,440
Earnings before interest and taxes $ 3,560
Interest 460
Earnings before taxes $ 3,100
Taxes (40%) 1,240
Net income 1,860
Dividends (45%) $ 837
Addition to retained earnings $ 1,023
Suppose 2005 sales are projected to increase by 15 percent over 2004 sales. What additional funds are needed. The company is operting at full capacity in 2004, it cannot sell any of its fixed assets, and any required financing will be borrowed as notes payable. Assets, spontaneous liabilities, and operting costs are expected to increase by the same percentage as sales.
Use the percent of sales method to develop a pro forma balance sheet and income statement for 12-31-05. Use an interest rate of 10 percent on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.