Preparing Martin Manufacturing’s 20X3 Pro Forma Financial Statements
To improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 20X3. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firm’s 20X3 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 20X2 financial statements presented in the Chapter 3 case, along with the key projected financial data summarized in the following table.
Martin Manufacturing Company
Key Projected Financial Data for 20X3
Data Item Value
Sales Revenue $6,500,000
Minimum Cash Balance $25,000
Inventory Turnover (times) 7.0X
Average Collection Period 50 Days
Fixed Asset Purchases $400,000
Total Dividends (preferred & common) $20,000
Depreciation Expense $185,000
Interest Expense $97,000
Accounts Payable Increase 20%
Accruals, Long term debt, notes payable, preferred and common stock remain unchanged.
Ignore projecting income tax expense.
To Do:
Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 20X3. (Hint: Use the percent-of-sales method to estimate all values except depreciation expense and interest expense, which have been estimated by management and included in the table.)
Use the projected financial data along with relevant data from the pro forma income statement prepared in part a to prepare the pro forma balance sheet at December 31, 20X3. (Hint: Use the judgmental approach.)
Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain.