anch Western Wear Company has the following financial statements, which are representative of the company’s historical average. Income Statement Sales............................................ $200,000 Expenses.................................... 158,000 Earnings before interest and taxes 42,000 Interest...................................... 2,000 Earnings before taxes............ 40,000 Taxes.......................................... 20,000 Earnings after taxes................ $ 20,000
The Longbranch Western Wear Company has the following financial statements, which are representative of the company’s historical average.
|
Income Statement |
||||||
|
Sales............................................ |
$200,000 |
|||||
|
Expenses.................................... |
158,000 |
|||||
|
Earnings before interest and taxes |
42,000 |
|||||
|
Interest...................................... |
2,000 |
|||||
|
Earnings before taxes............ |
40,000 |
|||||
|
Taxes.......................................... |
20,000 |
|||||
|
Earnings after taxes................ |
$ 20,000 |
|||||
|
Dividends.................................. |
$ 10,000 |
|||||
|
Balance Sheet |
||||||
|
Assets |
Liabilities and Shareholders’ Equity |
|||||
|
Cash.............................. |
$ 10,000 |
|
Accounts payable............... |
$ 5,000 |
|
|
|
Accounts receivable..... |
10,000 |
Accrued wages................... |
1,000 |
|
||
|
Inventory...................... |
15,000 |
Accrued taxes..................... |
2,000 |
|
||
|
Current assets............. |
35,000 |
Current liabilities................ |
8,000 |
|
||
|
Capital assets................ |
70,000 |
Notes payable...................... |
7,000 |
|
||
|
|
|
Long-term debt.................... |
15,000 |
|
||
|
|
|
Common stock (at Par) 20,000 |
20,00 |
|
||
|
|
|
Paid In Capital 5,000
|
50,000 |
|
||
|
Total assets................... |
$105,000 |
Total Common Equity 75,000
Total liabilities and equity.... |
$105,000 |
|
||
Longbranch is expecting a 20 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of capital assets; instead, it will be done through more efficient asset utilization in the existing stores. The Dividends Payout Ratio remains unchanged and
a). Using a percent‐of‐sales method, determine whether Longbranch Western Wear has external financing needs.
b). Prepare a pro forma income statement and balance sheet with any financing adjustment made to notes payable, i.e including the external financing needs (the plug). If external financing is not required, excess funds are first used to reduce notes payable with the difference going towards reducing long-term debt.
c). Calculate the
Step by step
Solved in 2 steps
