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Accounting Presentation

Here are the key assumptions I made in preparing the budgeted income statement and pro forma balance sheet: - Sales in 19X5 will be 120% of 19X4 sales based on the information provided - Cost of goods sold and expenses are calculated based on the additional information provided - Ending inventory, accounts receivable and payable are assumed to be double the beginning amounts to reflect full production capacity late in the year - The $250,000 expenditure to complete the new plant is financed through a bank loan To summarize, based on the information provided and assumptions made, Mr. Larsen will need to borrow $238,000 from the bank.

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112 views12 pages

Accounting Presentation

Here are the key assumptions I made in preparing the budgeted income statement and pro forma balance sheet: - Sales in 19X5 will be 120% of 19X4 sales based on the information provided - Cost of goods sold and expenses are calculated based on the additional information provided - Ending inventory, accounts receivable and payable are assumed to be double the beginning amounts to reflect full production capacity late in the year - The $250,000 expenditure to complete the new plant is financed through a bank loan To summarize, based on the information provided and assumptions made, Mr. Larsen will need to borrow $238,000 from the bank.

Uploaded by

gelly studies
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Managerial

Accounting

GROUP 4:
HOBBIE AIREEN NOGAS
E N A A P I TA N A
M I C H E L L E R I Z Z A M O RA
Question:
Larsen Company makes fertilizer in a Midwestern state. The company has
nearly completed a new plant that will produce twice as much as the old
plant which is being scrapped. Swen Larsen, the owner, has consulted
you about his financing requirements for the coming year. He knows he
will require additional financing because of the doubling production, and
he intends to obtain a loan as soon as possible. He is on good terms with
local bankers and anticipates no difficulty in obtaining the loan, but he is
anxious that the loan not to be too large or too small.
The production process in the new plant is highly automated and can
be carried out with a work force of the same size as that used last year
in the old plant. The income statement for last year and the year-end
balance sheet are as follows:

Income Statement for 19x4

Sales $1,600,000
Cost of Goods Sold $ 1,040,000
Gross Profit 560,000
Selling, general and 390,000
administrative expense
Income $170,000
Balance Sheet at December 31,19x4

Assets Equities

Cash $ 40,000 Accounts Payable $ 20,000


Accounts $ 80,000 Common Stock $ 900,000
Receivable
Inventory of $ 250,000 Retained Earnings $ 150,000
Materials
Total Current $ 370,000
Assets
Plant and
Equipment
- Old plant 0
-New plant $ 700,000
Total $ 1,070,000 Total $ 1,070,000
You learned that depreciation expense on the old plant was $80,000 per
year, all of which was included in cost of goods sold. The new plant will
be depreciated at $120,000 per year. Wages paid last year to production
workers were $280,000. Materials purchases were $400,000, which is
also the amount of materials cost included in Cost of Goods Sold (the
beginning and ending inventories of materials were the same). Factory
overheard, other than depreciation, was $280,000 last year and expected
to be $360,000 in the coming year.
Selling, general, and administrative expenses are expected to be
$430,000 during the coming year. Sales will be only 120% of last year’s
sales because it will take some time to reach the full output of the new
plant. Larsen expects to spend $250,000 buying the new equipment to
complete the new plant. This expenditure will be made as soon as he
obtains the new loan. The factory will be operating at full capacity the
last few months of the year, so ending requirements for current assets
should be double the beginning amounts. Accounts Payable is closely
related to the amount of the inventory carried. The company ship its
products on completion so all inventory is raw materials.

Required:
Prepare a budgeted Income Statement for 19x5 and a pro forma Balance
Sheet for December 31, 19x5. State any assumptions you have to make
and indicate how much Mr. Larsen must borrow from the bank
LARSEN COMPANY
Income Statement (Budgeted)
For Year Ended December 31, 19X5 (with comparative for 19x4)

19X5 19X4
Sales 1) $1,920,000.00 $1,600,000.00

Cost of Goods Sold 2) $1,248,000.00 $1,040,000.00

Gross Profit $672,000.00 $560,000.00

Less:
Operating Expense - Depreciation $72,000.00

Selling, General and Administrative


Expenses $430,000.00 $430,000.00

Net Income $170,000.00 $170,000.00


1) Sales (1,600,0000 x 120%) $1,920,000.00
2) COGS:
Beginning Inventory of Materials + $250,000.00
Purchases 19x5* + 738,000.00
Total Materials Available for Use = $988,000.00
Ending Inventory of Materials (see no 1 of BS Schedule) - 500,000.00
Total Materials Used = $488,000.00
Direct Labor ( same as last year work force) + 280,000.00
Depreciation - New Plant + 120,000.00
Factory Overhead + 360,000.00
Total Manufacturing Cost = $1,248,000.00
WIP Beginning + -
WIP Ending - -
Cost of Goods Manufactured = 1,248,000.00
Finished Goods Inventory Beginning + -
Finished Goods Inventory Ending - -
Cost of Goods Sold = $1,248,000.00
Purchases:
COGS + $1,248,000.00

Ending Inventory of Materials + 500,000.00

Beginning Inventory of Materials - 250,000.00

Direct Labor ( same as last year work force) - 280,000.00

Depreciation (new plant) - 120,000.00

Factory Overhead - 360,000.00


Purchases 19x5 = $738,000.00
LARSEN COMPANY
Balance Sheet (Pro forma )
As of December 31, 19X5 (with comparative for 19x4)
19X5 19X4
ASSETS
Current Assets
Cash $80,000.00 $40,000.00
Accounts Receivable 160,000.00 80,000.00
Inventory of Materials 500,000.00 250,000.00
Total Current Assets 1) $740,000.00 $370,000.00

Plant and Equipment


Old plant 0.00 0.00
New Equipment 250,000.00 0.00
Accumulated Depreciation - Equipment (72,000.00) 0.00
New Plant 700,000.00 700,000.00
Accumulated Depreciation - New Plant (120,000.00) 0.00
Total Plant and Equipment $758,000.00 $700,000.00

Total Assets $1,498,000.00 $1,070,000.00

LIABILITIES & EQUITIES


Accounts Payable 3) $40,000.00 $20,000.00
Loans Payable – Bank 4) 238,000.00 0.00
Common Stock 900,000.00 900,000.00
Retained Earnings 2) 320,000.00 150,000.00

Total Liabilities & Equities $1,498,000.00 $1,070,000.00


LARSEN COMPANY
Statement of Cash flows (Pro forma )
As of December 31, 19X5

19X5
Operating Activities
Net Income + $170,000.00
Depreciation (New plant & equipment) + 192,000.00
AR - Increase - 80,000.00
Inventory - Increase - 250,000.00
AP- Increase + 20,000.00
Cash Provided for Operating Activities = 52,000.00

Investing Activities
Equipment - Increase - 250,000.00

Financing Activities
Loan Payable - Bank + 238,000.00
Net Cash Increase = $40,000.00

Cash Beginning + 40,000.00

Cash Ending = $80,000.00


1) Current Assets 19x5 (200% of Beginning)
Cash (40,000 x 200%) + $80,000.00
Accounts Receivable (80,000 x 200%) + 160,000.00
Inventory of Materials (250,000 x 200%) + 500,000.00
Total Current Assets 19x5 = $740,000.00

2) Retained Earnings
Retained Earnings 19x4 + $150,000.00
Net Income 19x4 + 170,000.00
Retained Earnings 19x5 = $320,000.00

3) Accounts Payable (500,000 x 20/250) $40,000.00


(20/250 is based from last year's AP(20,000) and Inventory (250,000), AP is closely related to the amount of
Inventory carried )

4) Loans Payable – Bank


Total Assets + $1,498,000.00
Accounts Payable - 40,000.00
Total Equities - 1,220,000.00
Loans Payable 19x5 = $238,000.00

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