Question

Narcolarm, Inc. (B) Mary Lou Black, M.D., president of Narcolarm, Inc., was in the process of preparing a business plan, including some pro forma (i.e. projected) financial statements, for her new venture [See Narcolarm, Inc. (A)]. Enlisting the help of a niece who had recently completed a course in accounting, Dr. Black first pre- pared a list of requirements and activities necessary to launch the new enterprise, which she called "Narcolarm, Inc." These requirements and activities led to the development of an initial balance sheet, shown in Exhibit 1. Next, again with the help of her niece, Dr. Black projected the activities that would take place during the first year of operations. These are shown in Exhibit 2. She realized that these were overall estimates, and that they would not necessarily occur in the sequence shown, but she felt they were sufficient to allow her to prepare a set of pro forma financial statements for the first year of operations. She planned to produce all Narcolarms to order, so that she would not have to worry about carrying any inventories. The only items in inventory would be the raw materials needed to manufacture the devices. Assignment 1. Beginning with the balance sheet shown in Exhibit 1, and using up T Accounts, indicate the effect of each of the activities listed in Exhibit 2. For example, Item I would result in a debit to Cash of $150,000, a debit to Ac- counts Receivable of $50,000, and a credit to Retained Earnings of $200,000. 2. Prepare a pro forma balance sheet as of the end of that year. 3. What do you think of Dr. Black's proposed venture?

(Question 2) Prepare a pro forma balance sheet as of the end of that year.

Answer 1

$ 40000 NORCALARM INC.(B) Performa Balance Sheet at the End of the Year Assets $ Liabilities & Equity Current Assets Current Liabilities Cash 19000 Account Payable Rawmaterial inventory 60000 Long Term Liaiblities Account Receivable 50000 Loan Payable Total Current assets 129000 Total Liabilities Long Term Assets Equity Machinery 40200 Contributory Capital Patent 25000 Retained Earnings Total Long Term Assets 65200 Total Equity Total assets 194200 Total Liabilities & Equity 16000 56000 75000 63200 138200 194200

Details Beg. Bal Retained earnings Cash Amount Amount Details 15000 150000 5000 Equipment 60000 Rawmaterial inventory 40000 Wages 25000 Selling And Administration 10000 Other Selling And Administration 2000 Interest on Bank loan 4000 Bank loan End Bal. Details Beg. Bal Cash Account Payable End Bal. 19000 Rawmaterial Inventory Amount Amount Details 15000 60000 55000 Inventory Consumed(Balancing Figure) 40000 60000

Details Beg. Bal Cash Machinery & Equipment Amount Amount Details 40000 5000 4800 Accumulated Depreciation on machinery End Bal. 40200 Patent Amount Amount Details 25000 Details Beg. Bal End Bal. Details Beg. Bal Cash 25000 Loan Payable Amount Amount Details 20000 4000 bank Loan principal repayment End Bal. 16000

Details Beg. Bal Supplies Contributed Capital Amount Amount Details 75000 End Bal. Details Beg. Bal Cash Account Receivable 75000 Retained Earnings Amount Amount Details 0 150000 40000 Wages 50000 25000 Selling and adminstration 10000 Other Selling and adminstration 55000 Inventory consumed 2000 Interest on Bank loan 4800 Depreciation on Machinery 63200 End Bal.

Account Receivable Amount Details Details Amount Beg. Bal 0 Retained Earnings 50000 End Bal. 50000 Account Payable Details Amount Amount Details 0 Rawmaterial inventor 40000 Beg. Bal End Bal. 40000

The proposed venture is is very good as it will make a profit of $63200.