Question

QUESTION 14 Cary Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Sales for 2002 were $450 million. They are forecasted to increase to $500 million in 2003. Additional information and relevant financial ratios are given below: Minimum cash balance required : $1.8 million Average collection period (accounts receivable/sales/365)): 60 days Inventory turnover (COGS/inventory): 3.18 Net fixed assets: Current level of $216 million. The firm expects to acquire new plant and equipment worth 58 million in 2003. Accounts payable: 496 of annual sales LT debt: existing LT debt is $110 million out of which the company expects to repay $15 million in 2003. Common stock: expected to remain constant at its 2002 level of $120 million. COGS: 70% of sales Depreciation: Annual depreciation for 2003 expected to be $15 million. Net profit margin: 696 of projected sales in 2003. Dividends: expected to be 40% of net income. Retained earnings at the end of 2002: 130 million. a) Based on the information given above, forecast the income statement for year ended December 31, 2003. b) Based on the information given above, and your estimate of retained earnings from part (a). forecast the pro forma balance sheet as of December 31, 2003. Assume that any additional funds requirement will be met by notes payable. The firm does not have any notes payable at the end of 2002. Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers

Answer 1

INCOME STATEMENT

FOR THE YEAR ENDED, 2003

	Amount Million($)
Revenues :
Sales	500
Less: Cost of goods sold	(350)
Gross profit	150
Less : Depreciation	(15)
Less: Selling general and administrative expenses *	(105)
Net profit margin (6% of sales)	30

Working note:

(1) Cost of goods sold = 70% of sales

70% of $500 millions = $350 millions

(2) Selling general and administrative expenses are balancing figure after deducted all expenses

given in the questions. This is because net profit margin is given 6% of projected sales in 2003 i.e. 6% of $500 millions = 30 millions

BALANCE SHEET

FOR THE YEAR ENDED, 2003

Assets:
Current assets:
Cash	1.8
Account receivable*	82.2
Inventory*	110.0
Net fixed assets*	209
Total assets		403
Liabilities and stockholders' equity
Account payable (4% of annual sales)	20
Long term debt ($110 millions - $15 millions)	95
Notes payable	8
Dividend Payable*	12
Shareholders' Equity:
Common stock	120
Retained earning*	148
Total liabilities and stockholders' equity		403

Working note:

(1) Average collection period = 60 days

Average collection period (days) = Account receivable/ (Net sales/365)

Net sales = $500 millions

Account receivable =( 500*60)/365

= $82.2millions

(2)

Inventory turnover = 3.18

Inventory turnover= Cost of goods sold/Inventory

Inventory = 350/3.18

= $110 millions

(3) Fixed assets

	Amount Millions ($)
Net fixed assets (2002)	216
Add: purchase during the year	8
Less : Depreciation expense	(15)
Net fixed assets (2003)	209

(4)

Dividend Payable = 40% of net income

Net income = $30 millions

Dividend Payable (40% of $30 millions) = $12 millions

(5)

Retained earning

	Amount $ (Millions)
Retained earning (2002)	130
Add: Net income	30
Less: Dividend Payable	(12)
Retained earning	148

(6)

Notes payable = $8 miillions (Amount of fixed assets purchase)