136 PART 1 Introduction to Managerial Finance
LG5b. Explain how the percent-of-sales method could result in an overstatement of
profits for the pessimistic case and an understatement of profits for the most
likely and optimistic cases.
c. Restate the pro forma income statements prepared in part ato incorporate
the following assumptions about costs:
$250,000 of the cost of goods sold is fixed; the rest is variable.
$180,000 of the operating expenses is fixed; the rest is variable.
All of the interest expense is fixed.
d. Compare your findings in part cto your findings in part a.Do your observa-
tions confirm your explanation in part b?3–16 Pro forma balance sheet—Basic Leonard Industries wishes to prepare a pro
forma balance sheet for December 31, 2004. The firm expects 2004 sales to total
$3,000,000. The following information has been gathered.
(1) A minimum cash balance of $50,000 is desired.
(2) Marketable securities are expected to remain unchanged.
(3) Accounts receivable represent 10% of sales.
(4) Inventories represent 12% of sales.
(5) A new machine costing $90,000 will be acquired during 2004. Total depre-
ciation for the year will be $32,000.
(6) Accounts payable represent 14% of sales.
(7) Accruals, other current liabilities, long-term debt, and common stock are
expected to remain unchanged.
(8) The firm’s net profit margin is 4%, and it expects to pay out $70,000 in cash
dividends during 2004.
(9) The December 31, 2003, balance sheet follows.a. Use the judgmental approachto prepare a pro forma balance sheet dated
December 31, 2004, for Leonard Industries.
b. How much, if any, additional financing will Leonard Industries require in
2004? Discuss.Leonard Industries
Balance Sheet
December 31, 2003
Assets Liabilities and Stockholders’ EquityCash $ 45,000 Accounts payable $ 395,000
Marketable securities 15,000 Accruals 60,000Accounts receivable 255,000 Other current liabilities (^3) (^0) , (^0) (^0) (^0)
Inventories (^3) (^4) (^0) , (^0) (^0) (^0) Total current liabilities $ 485,000
Total current assets $ 655,000 Long-term debt $ 350,000
Net fixed assets $ (^6) (^0) (^0) , (^0) (^0) (^0) Common stock $ 200,000
Total assets $
1
,
2
5
5
,
0
0
0
Retained earnings $
2
2
0
,
0
0
0
Total liabilities and
stockholders’ equity $
1
,
2
5
5
,
0
0
0