Question

Pro forma balance sheet Peabody & Peabody has 2019 sales of $10.5 million. It wishes to analyze expected performance and financing needs for 2021—2 years ahead. Given the following information, respond to parts a. and b. (1) The percents of sales for items that vary directly with sales are as follows: Accounts receivable; 12.2%, Inventory; 17.7%; Accounts payable, 14.1%; Net profit margin, 3.4%. (2) Marketable securities and other current liabilities are expected to remain unchanged. (3) A minimum cash balance of $477,000 is desired. (4) A new machine costing $650,000 will be acquired in 2020, and equipment costing $853,000 will be purchased in 2021. Total depreciation in 2020 is forecast as $293,000, and in 2021 $390,000 of depreciation will be taken. (5) Accruals are expected to rise to $500,000 by the end of 2021. (6) No sale or retirement of long-term debt is expected. (7) No sale or repurchase of common stock is expected. (8) The dividend payout of 50% of net profits is expected to continue. (9) Sales are expected to be $11.7 million in 2020 and $11.6 million in 2021. (10) The December 31, 2019, balance sheet is here 3.

Answer 1

Answer:

a.

Pro Forma Balance Sheet
Peabody & Peabody
31-Dec-21
Assets
Current Assets:
Cash	477,000
Marketable Securities	204,000
Accounts Receivable	1,415,200
Inventories	2,053,200
Total Currrent Assets	4,149,400
Net Fixed Assets	4,819,000
Total Assets	8,968,400

Liabilities and stockholders’ equity:
Current liabilities
Accounts payable	1,635,600
Accruals	500,000
Other current liabilities	80,000
Total current liabilities	2,215,600
Long-term debts	1,987,000
Total liabilities	4,202,600
Common equity	4,112,100
External funds required	653,700
Total liabilities and stockholders’ equity	8,968,400

b.

Peabody & Peabody need to arrange for additional financing of $653,700 over the next two years suggested by the statement prepared in part ​(a​).

Calculation:

To prepare the pro forma balancesheet we need to do the following calculations as mentioned in the question:

Accounts Receivable = 11,600,000 x 12.20% = 1,415,200

Inventories = 11,600,000 x 17.70% = 2,053,200

Net fixed assets:

Beginning net fixed assets (January 1, 2020)	3,999,000
Plus: Fixed asset outlays (650000 + 853000)	1,503,000
Less: Depreciation expense (293000 + 390,000)	683,000
Ending net fixed assets (December 31, 2021)	4,819,000

Accounts payable = 11,600,000 x 14.10% = 1,635,600

Beginning common equity (January 1, 2020)	3,716,000
Plus: Net profits after taxes (2020)  11,700,000 x 3.40%	397,800
Net profits after taxes (2021) 11,600,000 x 3.40%	394,400
Less: Dividends paid (2020) 397,800 x 50%	(198,900)
Dividends paid (2021) 394,400x 50%	(197,200)
Ending common equity (December 31, 2021)	4,112,100

So the External funds required = Total Assets - (Total liabilities + Common stock) = 8,968,400 - (4,202,600+ 4,112,100) = 653,700