Question

(Forecasting financing needs) The current balance sheet of the Murphy Forkilifts, Inc., is as follows: EEB- Murphy had sales for the year ended December 31, 2016, of $51.11 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, Murphy generates no funds from its eamings that can be used to expand its operations. (Assume that depreciation expense is equal to the cost of replacing worn-out assets.). Hint: Make sure to round all intermediate calculations to at least five decimal places a. If Murphy anticipates sales of $98.45 million during the coming year, develop a pro forma balance sheet for the firm for December 31, 2017. Assume that current assets are a percent of sales, net fixed assets remain unchanged, and accounts payable vary as a percentage of sales. Use notes payable as a balancing entry. How much new financing will Murphy need next year? What are the limitations of the percent-of-sales forecast method? Discuss briefly a. If Murphy anticipates sales of $98.45 mlin during the coming year, develop a pro forma balance sheet for the firm for December 31, 2017. Assume that current assets are a percent of sales, net fixed assets remain unchanged, and accounts payable vary as a percentage of sales. Use notes payable as a balancing entry. Round to the nearest dollar.) Murphy Forklifts, Inc. Pro Forma Balance Sheet as of 12/31/17 Current assets Net fixed assets Total assets Accounts payable Notes payable Bonds payable Common equity Total liabilities and common equity $ Murphy Forklifts, Inc., Balance Sheet, December 31, 2016 ($ millions) Current assets $9.31Accounts payable 14.67 Notes payable $4.45 Net fixed assets 0.00 10.08 $23.98 Bonds payable Total 9.45 $23.98 Total

Answer 1

Workings :

2016 data :

Sales = $51.11 million

Current assets = $9.31 million

Accounts payable = $4.45 million

% of sales :

Current assets % = Current assets / Sales

Current assets % = $9.31 / $51.11

Current assets % = 0.1822 or 18.22%

Accounts payable % = Accounts payables / Sales

Accounts payable % = $4.45 / $51.11

Accounts payable % = 0.0871 or 8.71%

Now, Proforma data (2017)

Estimated sales = $98.45 million

i) New current assets = Estimated Sales * Current assets % of 2016 sales

New current assets = $98.45 * 18.22%

New current assets = $17.94 million

ii) New accounts payable = Estimated sales * Accounts payable % of 2016 sales

New accounts payable = $98.45 * 8.71%

New accounts payable = $8.58 million

iii) New fixed assets (same) = $14.67 million

iv) New common equity (same) = $9.45 million

New bonds payable (same) = $10.08 million

Note : Common equity & bonds payable will remain same for 2017.

a) Proforma Balancesheet 2017 :

Particulars	Amount (in millions)
Current assets	$17.94
Net fixed assets	$14.67
Total assets	$31.61
Accounts payable	$8.58
Notes payable (balancing figure)	$3.50
Bonds payable	$10.08
Common equity	$9.45
Total liabilities & common equity (equals to total assets)	$31.61

b) New financing nedeed = Notes payable balancing figure of $3.50 million

c) Limitations of % of sales method :

i) This method only represents only approximation & lack details.

ii) This method does not consider several types of assets.

iii) There is lack of sales history or data.

iv) It is difficult to forecast industry competition.