Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans.
The following financial data are also available:
(1) The firm has estimated that its sales for 2020 will be $900,000.
(2) The firm expects to pay $35,000 in cash dividends in 2020.
(3) The firm wishes to maintain a minimum cash balance of $30,000.
(4) Accounts receivable represent approximately 18% of annual sales.
(5) The firm’s ending inventory will change directly with changes in sales in 2020.
(6) A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.
(7) Accounts payable will change directly in response to changes in sales in 2020.
(8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
(9) Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.
b. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required.

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Red Queen Restaurants Income Statement for the Year Ended December 31, 2019 $800,000 Sales revenue Less: Cost of goods sold Gross profits 600,000 $200,000 Less: Operating expenses 100,000 Net profits before taxes $100,000 Less: Taxes (rate = 40%) 40,000 $ 60,000 Net profits after taxes Less: Cash dividends 20,000 To retained earnings $ 40,000 Red Queen Restaurants Balance Sheet December 31, 2019 Assets Liabilities and stockholders' equity Cash $ 32,000 Accounts payable $100,000 Marketable securities 18,000 Taxes payable 20,000 Accounts receivable 150,000 Other current liabilities 5,000 Inventories 100,000 Total current liabilities $125,000 Total current assets $300,000 Long-term debt 200,000 $325,000 Net fixed assets 350,000 Total liabilities Total assets $650,000 Common stock 150,000 Retained earnings 175,000 Total liabilities and stockholders’ equity $650,000