Question

ntegrative—Pro

forma statements   Provincial Imports, Inc., has assembled past

(2019)

financial statements (income statement and balance sheet

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)

and financial projections for use in preparing financial plans for the coming year

(2020).

Information related to financial projections for the year

2020

is as follows:

(1) Projected sales are

$6,007,000.

(2) Cost of goods sold in

2019

includes

$991,000

in fixed costs.

(3) Operating expense in

2019

includes

$253,000

in fixed costs.

(4) Interest expense will remain unchanged.

(5) The firm will pay cash dividends amounting to

40%

of net profits after taxes.

(6) Cash and inventories will double.

(7) Marketable securities, notes payable, long-term debt, and common stock will remain unchanged.

(8) Accounts receivable, accounts payable, and other current liabilities will change in direct response to the change in sales.

(9) A new computer system costing

$354,000

will be purchased during the year.  Total depreciation expense for the year will be

$114,000.

(10) The tax rate will remain at

40%.

a. Prepare a pro forma income statement for the year ended December 31,

2020,

using the fixed cost data given to improve the accuracy of the percent-of-sales method.

b. Prepare a pro forma balance sheet as of December 31,

2020,

using the information given and the judgmental approach. Include a reconciliation of the retained earnings account.

c. Analyze these statements, and discuss the resulting external financing required.