Question

1.Forma Statements [LO1] Consider the following simplified financial statements for the Wims Corporation (assuming no income taxes):

Income Statement Balance Sheet

Sales $38,000 Assets $27,300 Debt $ 6,700

Costs 32,600 Equity 20,600

Net income $ 5,400 Total $27,300 Total $27,300

The company has predicted a sales increase of 15 percent. It has predicted that every item on the balance sheet will increase by 15 percent as well. Create the pro forma statements and reconcile them. What is the plug variable here?

2.Pro Forma Statements and EFN [LO1, 2] In Question 1, assume the company pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements and determine the external financing needed.

Answer 1

Proforma income statement Sales(38000*1.15) Costs(32600*1.15) Net income 43700 37490 6210 Assets(27300*1.15) 31395 Debt(6700*1.15) Equity(20600*1.15) | 31395 Total 7705 23690 31395 Total Ending equity=Beginning equity+Net income-Dividends 23690=20600+6210-Dividends Dividends=(20600+6210-23690) =$3120. Hence the plug variable is dividends in the amount of $3120. Proforma income statement Sales(38000*1.15) Costs(32600*1.15) Net income 43700 37490 6210 Assets(27300*1.15) 31395 Debt Dift Equity(20600+3105*1.15) 31395 Total 3105 7690 23705 31395) Total Retained Earnings(6210*50%)= Determine the external financing needed Total Fund Needed = 15%*27300 = $ 4095 Retained Earning = $ 3105 External Financing = 4095 - 3105 External Financing = $990