FIN 305 Lecture Notes - Lecture 4: Income Statement, Accrual, Variable Cost
Get access
Related Documents
Related Questions
need some help filling out my balance and income statement using the following information given.
Using a Percentage of Sales method from 2017 results and the Given Information below, derive the 2018 Pro Forma (forecast) Income Statement and Balance Sheet (i.e. fill in the 2018 cells with the appropriate amounts).
Is there a âplugâ needed? If so, how much is it? What does it tell you about Scarletâs forecasted 2018 financial projections and what could Scarlet do to remedy the situation?
Based on Scarletâs 2017 & 2016 financials, what is her businessâs Sustainable Growth Rate (SGR)?
Given Information:
Scarlet believes that her 2018 Revenue figure will be 12% higher than her 2017 Revenue.
She estimates that her SG&A will go up by $1,000 from 2016-2017 since she plans on getting a part-time employee.
She doesnât intend to pay any dividends for 2018.
For her Balance Sheet forecasted items she uses only 2017 results, rather than taking an average of the results (average of the % of sales) from 2016 and 2017.
Scarlet assumes Interest Expense, Curr Portion of LT Debt, and Bank Loan Payable will remain the same in 2018 as they were in 2017.
Scarlet plans on issuing $1,000 of (new) Common Stock in 2018.
Scarlet determines that she will need to spend $3,700 for a new Lemon Press machine, which will be her entire CAPEX for 2018. We will assume depreciation will be $200 for this item for 2018, and the yearly depreciation/amortization expense for the rest of Scarletâs PPE will remain the same as it was in 2017 (and assume no asset sales were made in 2017).
Intangibles and Goodwill will remain unchanged in 2018.
She is not planning on disposing of any of her assets (i.e. no asset sales).
Income Statement | ||
2018 | 2017 | |
Sales / Revenue | 46,592 | 41,600 |
Cost of Goods Sold (COGS) | ? | 24,960 |
Gross Profit | ? | 16,640 |
Selling, General & Administrative (SG&A) | 13,940 | 12,940 |
Operating Profit | ? | 3,700 |
Interest Expense | ? | 2,000 |
Income Before Taxes | ? | 1,700 |
Income Tax Expense | ? | 595 |
Net Income | ? | 1,105 |
Assume No Dividends Paid |
Balance Sheet | |||||||||||
Assets | Liabilities and Stockholders' Equity | ||||||||||
Current Assets: | 2018 | 2017 | 2016 | Current Liabilities: | 2018 | 2017 | 2016 | ||||
Cash | ? | 2,500 | 5,495 | A/P | ? | 1,100 | 300 | ||||
A/R | ? | 800 | 1,300 | Deferred Revenue | ? | 700 | 1,000 | ||||
Inventory | ? | 2,900 | 1,600 | Curr Portion of LT Debt | ? | 2,200 | 5,300 | ||||
Prepaid Rent | ? | 2,200 | 1,800 | Wages Payable | ? | 2,600 | 4,600 | ||||
Prepaid Insurance | ? | 1,400 | 1,900 | Tot Curr Liab | ? | 6,600 | 11,200 | ||||
Tot Curr Assets | ? | 9,800 | 12,095 | ||||||||
LT Liab | |||||||||||
LT Assets | Bank Loan Payable | ? | 5,500 | 3,300 | |||||||
PPE, Gross | ? | 9,500 | 5,500 | Tot Liab | ? | 12,100 | 14,500 | ||||
Accumul Depr | ? | 2,800 | 2,000 | ||||||||
PPE, Net | ? | 6,700 | 3,500 | Stockholders' Equity | |||||||
Common Stock | 4,300 | 3,300 | 1,100 | ||||||||
Intangibles | ? | 3,000 | 3,000 | Retained Earnings | ? | 5,100 | 3,995 | ||||
Goodwill | ? | 1,000 | 1,000 | Total Stockholders' Equity | ? | 8,400 | 5,095 | ||||
Total Assets | ? | 20,500 | 19,595 | Total Liab + Stockholders' Equity | ? | 20,500 | 19,595 | ||||
2a. | PLUG (if necessary): | ? | |||||||||
What it tells you: | ? | ||||||||||
2b. | Sustainable Growth Rate (SGR): | ? |
Break-Even Sales Under Present and Proposed Conditions
Battonkill Company, operating at full capacity, sold 131,600 units at a price of $75 per unit during 2014. Its income statement for 2014 is as follows:
Sales | $9,870,000 | ||
Cost of goods sold | 3,500,000 | ||
Gross profit | $6,370,000 | ||
Expenses: | |||
Selling expenses | $1,750,000 | ||
Administrative expenses | 1,050,000 | ||
Total expenses | 2,800,000 | ||
Income from operations | $3,570,000 |
The division of costs between fixed and variable is as follows:
Fixed | Variable | |||
Cost of goods sold | 40% | 60% | ||
Selling expenses | 50% | 50% | ||
Administrative expenses | 70% | 30% |
Management is considering a plant expansion program that will permit an increase of $900,000 in yearly sales. The expansion will increase fixed costs by $120,000, but will not affect the relationship between sales and variable costs.
Required:
1. Determine for 2014 the total fixed costs and the total variable costs.
Total fixed costs | $ |
Total variable costs | $ |
2. Determine for 2014 (a) the unit variable cost and (b) the unit contribution margin.
Unit variable cost | $ |
Unit contribution margin | $ |
3. Compute the break-even sales (units) for 2014.
units
4. Compute the break-even sales (units) under the proposed program.
units
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $3,570,000 of income from operations that was earned in 2014.
units
6. Determine the maximum income from operations possible with the expanded plant.
$
7. If the proposal is accepted and sales remain at the 2014 level, what will the income or loss from operations be for 2015?
$ SelectIncomeLossItem 10
8. Based on the data given, would you recommend accepting the proposal?
In favor of the proposal because of the reduction in break-even point.
In favor of the proposal because of the possibility of increasing income from operations.
In favor of the proposal because of the increase in break-even point.
Reject the proposal because if future sales remain at the 2014 level, the income from operations of will increase.
Reject the proposal because the sales necessary to maintain the current income from operations would be below 2014 sales.
Choose the correct answer.