When making capital investment decisions, businesses prepare pro-forma financial statements. Explain pro-forma financial statements and tell what benefit they have to decision-makers. Provide examples.
When making capital investment decisions, businesses prepare pro-forma financial statements. Explain pro-forma financial statements and tell what benefit they have to decision-makers. Provide examples.
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TABLE 3.3 Pro Forma Financial Statements for R&E Supplies,Inc., December 31, 2018 ($ thousands)
Income Statement | ||
|---|---|---|
2018 | Comments | |
Net sales | $25,766 | 25% increase |
Cost of goods sold | 22,159 | 86% of sales |
Gross profit | 3,607 | |
Expenses: | ||
âGeneral, selling, and administrative expenses | 3,092 | 12% of sales |
âNet interest expense | 90 | Initially constant |
Earnings before tax | 425 | |
Tax | 191 | 45% tax rate |
Earnings after tax | $ 234 | |
Balance Sheet | ||
Assets | ||
Current assets: | ||
âCash and securities | $ 1,271 | 18 days sales |
âAccounts receivable | 3,600 | 51-day collection period |
âInventories | 2,462 | 9 times turnover |
âPrepaid expenses | 20 | Rough estimate |
ââTotal current assets | 7,353 | |
Net fixed assets | 280 | See text discussion |
Total assets | $ 7,633 | |
Liabilities and Ownersâ Equity | ||
Current liabilities: | ||
âBank loan | $ 0 | |
âAccounts payable | 3,582 | 59-day payables period |
âCurrent portion of long-term debt | 100 | See text discussion |
âAccrued wages | 22 | Rough estimate |
ââTotal current liabilities | 3,704 | |
Long-term debt | 660 | |
Common stock | 150 | |
Retained earnings | 1,697 | See text discussion |
Total liabilities and ownersâ equity | $ 6,211 | |
External funding required | $ 1,422 | |
Table 3.3 shows the December 31, 2018 pro forma balance sheetand income statements for R&E Supplies, Inc. The pro-formabalance sheet shows that R&E Supplies will need externalfunding from the bank of $1.4 million. However, they show almost$1.3 million in cash and short-term securities. Why are theytalking to the bank for such a large amount when they have most ofthis sum in their cash account?
