Question

How do I calculate the year-end bank loan balance for this question?

Lydia’s sale grew by 30% in 2018 and 25% in 2019.  She excepts similar growth in 2020, but this is straining her cash reserves.  Her bank is concerned about her loan amount exceeding $100,000.

Because the fishing season effectively ends in late fall, Lydia’s accountant has completed the financials for 2019.  There may be some small changes, but the current 2019 numbers are sufficiently accurate for 2020 planning purposes.

Use the actual financial statements for 2019 and the assumptions below to construct pro forma financial statements for 2020 for The Dry Fly.   Submit your pro forma statements and refer to the pro forma statements to answer the following questions.  The form on the next page should be used for your pro forma.

1. Develop pro forma financial statements for 2020. (9 points)

2. What will the 2020 year-end bank loan balance be?  (2 points)

3. Create a Sources and Uses statement to show the items driving Lydia’s loan need? (2 points)

4. In a few sentences comment on the change in the loan amount compared to the large increase in Sales.  If Sales growth begins to level off what will happen to the loan amount in the future? (2 points)

Assumptions

• Sales will increase 25% in 2020

• COGS will remain 72% of Sales in 2020.

• GA&S will increase by $22,000 in 2020.

• In 2020, depreciation expense will be $8,000, no assets will be sold and $10,000 of new assets will be purchased.

• The bank loan has an interest rate of 8%.  Base your Interest Expense for 2020 on the year-end bank loan balance

• The tax rate is 30%.

• Cash, A/Receivable, Inventory and A/Payable will be the same % of sales in 2020 as they were in 2019.  The minimum cash balance is 1% of Sales.

• All earnings are retained to finance growth (No dividends are paid).

• Assume Cash is kept at its minimum level as long as there is a loan outstanding.
• Common Stock is unchanged at $40,000 in 2020.

The Dry Fly Financial Statements

2019 Actual and 2020 Pro Forma

Income Statement	2019	2020 Pro Forma
Sales	550,000.00
COGS	396,000.00
Gross Margin	154,000.00
GA&S Expense	110,000.00
Interest Expense	15,050.00
Depreciation Expense	6,000.00
Taxable Income	22,950.00
Taxes (30%)	6,885.00
Net Income	16,065.00
Balance Sheet
Assets	2019	2020 Pro Forma
Cash	5,500.00
A/Receivables	22,000.00
Inventory	137,500.00
Total Current Assets	165,000.00
Net Fixed Assets	80,000.00
Total Assets	245,000.00
Liabilities & Equity	2019	2020 Pro Forma
A/Payable	39,600.00
Bank Loan (8%)	80,000.00	-
Total Current Liabilities	119,600.00
Common Stock	40,000.00
Retained Earnings	85,400.00
Total Liabilities & Equity	245,000.00

Answer 1

I hereby submitting my answers for first two points A and B.

(A) Develop pro forma financial statements for 2020

(A)	Income Statement	2019	2020 Pro Forma
	sales	550000	687500
	COGS	396000	495000
	Gross Margin	154000	192500
	GS&S Expence	110000	132000
	Interest Expence	15050	6400
	Depreciation Expense	6000	8000
	Taxable Income	22950	46100
	Taxes (30%)	6885	13830
	Net Income	16065	32270
	Balance Sheet
	Assets	2019	2020 Pro Forma
	Cash	5500	6875
	A/R Receivable	22000	27500
	Inventory	137500	171875
	Total Current Assets	165000	206250
	Net Fixed Assets	80000	90000
	Toal Assets	245000	296250
	Liabilities & Equity	2019	2020 Pro Forma
	A/Payable	39600	49500
	Bank Loan (8%)	80000	89080
	Total Current Liabilities	119600	138580
	Common Stock	40000	40000
	Retained Earnings	85400	117670
	Total Liabilities & Equity	245000	296250
(B)	Bank loan year end balance for 2020 is $ 89080