Question

Pro forma Income Statement 6-8. The balance sheet of Free Enterprises, Inc., at the end of 2018 follows. Assets Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets Fixed Assets Total Assets Free Enterprises, Inc. Balance Sheet, Dec. 31, 2018 (Thousands of Dollars) Liabilities + Equity $ 4,000 Accounts Payable $ 4,400 10.000 Notes Payable 4,000 13,000 Accrued Expenses 5,000 400 Total Current Liabilities 13,400 27,400 Bonds Payable 6,000 11,000 Common Equity 19,000 $ 38,400 Total Liabilities and Equity $ 38,400 Net sales for 2018 were $85,000,000. The average annual sales growth rate is expected to be 10 percent every year for the next three years. Over the past several years the earnings before taxes (EBT) were 11 percent of net sales and are expected to remain the same over the next three years. The company's tax rate is 25 percent, and it plans to maintain the dividend payout ratio (dividends paid/net income) at 60 percent. Prepare a pro forma balance sheet for Free Enterprises, Inc., for December 31, 2019. Assume the accounts that are not a function of sales (fixed assets, notes payable, and bonds payable) remain the same as they were in 2018. Current assets and current liabilities will remain the same percentage of sales as in 2018. Assume the only change to common equity is for the addition to retained earnings.

Answer 1

Note-1 Profit & Loss-2019

Particulars	2019	Remarks
	('000 $)
Net Sales	93500	10% Growth over 2018
EBT	10285	11% of Net Sales
Tax	2571	25% of EBT
Net Income	7714
Dividend	4628	60% of Net Income
Retained Earnings	3086	Addition to Retained Earnings

Note-2 Current Assets & Current Liabilities Balances

Particulars	2018 ('000 $)	% of Net Sales	2019 ('000 $)	Changes in WC
Net Sales	85000		93500
Accounts Receivable	10000	11.76%	11000	1000
Inventory	13000	15.29%	14300	1300
Prepaid Expenses	400	0.47%	440	40
			TOTAL (A)	2340
Accounts Payable	4400	5.18%	4840	440
Accrued Expenses	5000	5.88%	5500	500
			TOTAL (B)	940
Changes in WC = (A-B)				1400

Note : Since Sales Growth is 10%, one may also simply increase the balances dependent on sales by 10%

Note-3 Cash Flow/Cash Balance at the end of the year

Particulars	('000 $)
Addition to Retained Earnings(Note-1)	3086
Changes in WC (Note-2)	-1400
Addition to Cash during 2019	1686
Opening Cash Balance	4000
Closing Cash Balance	5686

Note-4 Balance Sheet - 2019

Assets ('000 $)	2019	Liabilities + Equity ('000 $)	2019
Cash	5686	Accounts Payable	4840
Accounts Receivable	11000	Notes Payable*	4000
Inventory	14300	Accrued Expenses	5500
Prepaid Expenses	440	Total Current Liabilities	14340
Total Current Assets	31426	Bonds Payable*	6000
Fixed Assets*	11000	Common Equity (19000+3086)	22086
TOTAL	42426	TOTAL	42426
*These accounts shall remain the same as they were in 2018