Problems

ANSWERS TO ASSIGNMENT 3

1.It is important to remember that candor volition not maturation by the same percentage as the opposite assets. If every other item on the income rehearsal and remnant shroud increases by 10 percent, the pro forma income statement and eternal rest canvass will look like this:

pro forma income statement Pro forma eternal rest sheet

Sales$17,600Assets$9,790Debt$5,610
Costs13,750 justice4,180
plunder income$3,850 numerate$9,790 summation$9,790

In enunciate for the balance sheet to balance, equity must(prenominal) be:

integrity = Total liabilities and Equity Debt
Equity = $9,790 5,610
Equity = $4,180

Equity increased by:

Equity increase = $4,180 3,800
Equity increase = $380

Net income is $3,850 but equity only increased by $380. Thus, a dividend of $3,850 $380 or $3470 must have been paid. Dividends is the plug variable.

2.Here we are given the dividend amount, so dividends is not a plug variable. If the company pays out one-half of its net income as dividends, the pro forma income statement and balance sheet will look like this:

Pro forma income statement Pro forma balance sheet

Sales$17,600Assets$9,790Debt$5,100
Costs13,750Equity5,725
Net income$3,850Total$9,790Total$10,825

Dividends$1,925
Add.



to RE1,925

Note that the balance sheet does not balance. This is due to EFN which is:

EFN = Total assets Total liabilities and equity
EFN = $9,790 10,825
EFN = $1,035

3.An increase of sales to $5,192 is an increase of:

Sales increase = ($5,192 $4,400) / $4,400
Sales increase = .18 or 18%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Pro forma income statement Pro forma balance sheet

Sales$5,192Assets$15,812Debt$9,100
Costs3,168Equity6,324
Net income$2,024Total$15,812Total$15,424

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