Question

Review the following 2012 balance sheet and income statement for T. F. Baker Cosmetics Inc. appear below. The numerical values are in thousands of dollars.
At a recent board meeting, the firm decided on the following objectives for 2013:
1. The firm would increase liquidity. For competitive reasons, accounts receivable and inventory balances were expected to continue their historical relationships with sales and cost of goods sold, respectively, but the board felt that the company should double its cash holdings.
2. The firm would accelerate payments to suppliers. This would have two effects. First, by paying more rapidly, the firm would be able to take advantage of early payment discounts, which would increase its gross margin from 20% to 22%. Second, by paying earlier, the firm’s accounts payable balance, which historically averaged about 8.3% of cost of goods sold, would decline to 4% of cost of goods sold.
3. The firm would expand its warehouse, which would require an investment in fixed assets of $10 million. This would increase projected depreciation expense from $5 million in 2012 to $7 million in 2013.
4. The firm would issue no new common stock during the year, and it would initiate a dividend. Dividend payments in 2013 would total $1.2 million.
5. Operating expenses would remain at 10% of sales.
6. The firm did not expect to retire any long-term debt, and it was willing to borrow up to the limit of its current credit line with the bank, $20 million. The interest rate on its outstanding debts would average 8%.
7. The firm set a sales target for 2013 of $200 million.
Develop a set of pro forma financial statements to determine whether or not T. F. Baker Cosmetics can achieve all of these goals simultaneously.


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  • CreatedMarch 26, 2015
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