CHAPTER 3 Cash Flow and Financial Planning 125TABLE 3.16 A Pro Forma Balance Sheet, Using the Judgmental Approach,
for Vectra Manufacturing (December 31, 2004)
Assets Liabilities and Stockholders’ Equity
Cash $ 6,000 Accounts payable $ 8,100
Marketable securities 4,000 Taxes payable 455
Accounts receivable 16,875 Notes payable 8,300Inventories Other current liabilities (^3) , (^4) (^0) (^0)
Raw materials $ 4,000 Total current liabilities $ 20,255
Finished goods (^1) (^2) , (^0) (^0) (^0) Long-term debt $ 18,000
Total inventory (^1) (^6) , (^0) (^0) (^0) Stockholders’ equity
Total current assets $ 42,875 Common stock $ 30,000
Net fixed assets $ (^6) (^3) , (^0) (^0) (^0) Retained earnings $ (^2) (^9) , (^3) (^2) (^7)
Total assets $
1
0
5
,
8
7
5
Total $ 97,582
External financing requireda $ (^8) , (^2) (^9) (^3)
Total liabilities and
stockholders’ equity $
1
0
5
,
8
7
5
aThe amount of external financing needed to force the firm’s balance sheet to balance. Because of the nature of the judgmental approach, the bal-
ance sheet is not expected to balance without some type of adjustment.
nancing required—of $8,293 is needed to bring the statement into balance. This
means that the firm will have to obtain about $8,293 of additional external
financing to support the increased sales level of $135,000 for 2004.
Apositivevalue for “external financing required,” like that shown in Table
3.16, means that to support the forecast level of operation, the firm must raise
funds externally using debt and/or equity financing or by reducing dividends.
Once the form of financing is determined, the pro forma balance sheet is modified
to replace “external financing required” with the planned increases in the debt
and/or equity accounts.
A negativevalue for “external financing required” indicates that the firm’s
forecast financing is in excess of its needs. In this case, funds are available for use
in repaying debt, repurchasing stock, or increasing dividends. Once the specific
actions are determined, “external financing required” is replaced in the pro
forma balance sheet with the planned reductions in the debt and/or equity
accounts. Obviously, besides being used to prepare the pro forma balance sheet,
the judgmental approach is also frequently used specifically to estimate the firm’s
financing requirements.
Review Questions
3–16 Describe the judgmental approachfor simplified preparation of the pro
forma balance sheet.
3–17 What is the significance of the “plug” figure, external financing required?
Differentiate between strategies associated with positive and with nega-
tive values for external financing required.