140 PART 1 Introduction to Managerial Finance
(8) Accounts receivable, accounts payable, and other current liabilities will
change in direct response to the change in sales.
(9) A new computer system costing $356,000 will be purchased during the
year. Total depreciation expense for the year will be $110,000.
a. Prepare a pro forma income statement for the year ended December 31,
2004, using the information given and the percent-of-sales method.
b. Prepare a pro forma balance sheet as of December 31, 2004, using the infor-
mation given and the judgmental approach.Include a reconciliation of the
retained earnings account.
c. Analyze these statements, and discuss the resultingexternal financing
required.CHAPTER 3 CASE Preparing Martin Manufacturing’s
2004 Pro Forma Financial Statements
T
o improve its competitive position, Martin Manufacturing is planning to
implement a major equipment modernization program. Included will be
replacement and modernization of key manufacturing equipment at a cost of
$400,000 in 2004. The planned program is expected to lower the variable cost
per unit of finished product. Terri Spiro, an experienced budget analyst, has
been charged with preparing a forecast of the firm’s 2004 financial position,
assuming replacement and modernization of manufacturing equipment. She
plans to use the 2003 financial statements presented on pages 92 and 93, along
with the key projected financial data summarized in the following table.Required
a. Use the historical and projected financial data provided to prepare a pro
forma income statement for the year ended December 31, 2004. (Hint:UseMartin Manufacturing Company
Key Projected Financial Data (2004)
Data item ValueSales revenue $6,500,000
Minimum cash balance $25,000
Inventory turnover (times) 7.0
Average collection period 50 days
Fixed-asset purchases $400,000
Dividend payments $20,000
Depreciation expense $185,000
Interest expense $97,000
Accounts payable increase 20%
Accruals and long-term debt Unchanged
Notes payable, preferred and common stock Unchanged