PART 5: SPECIAL TOPICS
P16-3 Review the abbreviated financial statements for the last two years for Trefall Utility. All values are
expressed in billions of dollars.Trefall Utility balance sheet ($ in thousands)
2016 2015
Current assets $3.7 $3.5
Fixed assets 4.5 4.4
Total assets $8.2 $7.9
Current liabilities $1.9 $1.8
Long-term debt 3.1 3.2
Shareholders’ equity 3.2 2.9
Total liabilities and equity $8.2 $7.9
Trefall Utility income statement ($ in thousands)
2016 2015
Sales $8.5 $8.1
Net income 1.5 1.4
Dividends 0.6 0.4a What was Trefall Utility’s sustainable growth rate at the end of 2015?
b How rapidly did Trefall Utility’s actually grow sales in 2016?
c What changes in Trefall Utility’s financial condition from 2015 to 2016 can you trace to the
difference between the actual and sustainable growth rates?P16-4 The 2016 sales forecast for Flinston Development is $160 million. Interest expense will not change
in the coming year. Use Flinston Development’s 2015 income statement, presented below, to
answer the questions that follow.Flinston Development income statement ($ in thousands)
Sales $125,000
Less: Cost of goods sold 80,000
Gross profit $ 45,000
Less: Operating expenses 30,000
Less: Interest 10,000
Pre-tax profit $ 5,000
Less: Taxes (35%) 1,750
Net income $ 3,250a Use the percentage-of-sales method to construct a pro forma income statement for 2016.
b You learn that 25% of the cost of goods sold and operating expense figures for 2015 are fixed
costs that will not change in 2016. Reconstruct the pro forma income statement.
c Compare and contrast the statement prepared in parts (a) and (b). Which statement will likely
provide the better estimate of 2016 income? Explain.