Adel Sporting Goods recently reported the following income statement and balance sheet. INCOME STATEMENT Sales........................................... $4,200 Operating
Question:
Adel Sporting Goods recently reported the following income statement and balance sheet.
INCOME STATEMENT
Sales........................................... $4,200
Operating costs.................................3,780
EBIT............................................ $ 420
Interest............................................ 120
EBT............................................. $ 300
Taxes (40%)...................................... 120
Net income..................................... $ 180
Dividends paid.....................................$ 0
Addition to retained earnings............... $ 180
BALANCE SHEET
Cash and marketable securities............... $ 42
Accounts receivable.......................................336
Inventories....................................... 441
Current assets................................. $ 819
Net fixed assets............................... 2,562
Total assets....................................$3,381
Accounts payable and accruals............. $ 168
Notes payable....................................250
Current liabilities............................. $ 418
Long-term debt................................. 700
Common stock.................................. 400
Retained earnings............................. 1,863
Total liabilities and equity................. $3,381
In developing its forecast for the upcoming year, the company has assembled the following information:
Sales are expected to increase 8 percent this upcoming year.
• Operating costs are expected to remain at 90 percent of sales.
• Cash and marketable securities are expected to remain at 1 percent of sales.
• Accounts receivable are expected to remain at 8 percent of sales.
• Due to excess capacity, the company expects that its year-end inventories will remain at current levels.
• Fixed assets are expected to remain at 61 percent of sales.
• Spontaneous liabilities (accounts payable and accruals) are expected to increase at the same rate as sales.
• The company will continue to pay a zero dividend, and its tax rate will remain at 40 percent.
• The company anticipates that any additional funds needed will be raised in the following manner: 25 percent notes payable, 25 percent long-term debt, and 50 percent common stock.
a. On the basis of the assumptions listed above, construct Adel's pro forma income statement and balance sheet. Assume that there are no financial feedback effects. (That is, assume interest will remain unchanged even though the company may increase its debt.)
b. On the basis of this forecast, describe changes from the prior year that Adel should expect in its return on equity, inventory turnover ratio, and profit margin.
Inventory Turnover RatioInventory Turnover RatioThe inventory turnover ratio is a ratio of cost of goods sold to its average inventory. It is measured in times with respect to the cost of goods sold in a year normally. Inventory Turnover Ratio FormulaWhere,... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Step by Step Answer:
Fundamentals of Financial Management
ISBN: 978-0324272055
10th edition
Authors: Eugene F. Brigham, Joel F. Houston