Tire City Case

Pro forma income statements and balance sheets for 1996

& 1997
1/2 page
project the need for financing for the warehouse project
determined by the projected cash flows;
assess the financial health of Tire City before and after
the project is completed
General methodology for producing a forecast average
% of sales approach
Sales grow at 20% compounded
Cost of sales, S G & A average for past three years
96, use same for 97
Depreciation 96-213, 97-213+( 5% of 2400)
Net interest expense 96-129, 97-116
Income tax 45%
Dividends 20% of PAT
Cash 3% of sales
A/R 15% of sales
Inventories 96-given, 97-3148
Gross plant and equipment 96-given, 97-given
Accumulated depreciation from income statement
Current liabilities constant
A/P 6% of sales
Bank debt - plug figure to balance
Accrued expenses 7% of sales
Long term debt decline by 125
Common stock constant
Retained earnings beg RE +PAT-dividends
Ratios 95, 96, 97
Profitability
Return on assets
Gross margin
Return on equity
Liquidity
Current ratio
Quick ratio
Leverage
Debt to assets
Debt to equity
Times interest earned
Activity
Sales/assets
Days receivable
Days inventory
Days payable
Financial Statements - Forecast
Systematic projection expected actions of
management budgets, schedules, financial
statements
Working plan statistics, ratios, relationships, funds
flows, conditions, decisions, activities
Coordinated thinking future
Reduces emergency decisions, surprises
Sets standards of performance measure, control
Anticipate upcoming financial needs
Pro Forma statements - future
Pro forma operating statement
Sales
Trend growth in sales
% increase in number of stores
Inflation rate
Sales per square foot
Sales per employee
Assumptions estimates best guess
Historical relationships
Management forecasts
Industry data
Common sense
COGS percentage of sales
Other items less challenge past ratio
Financial Statements - Forecast
Income statement project other items
Classify cost behavior assumptions vary with sales?
Depreciation new assets
Interest new debt
Taxes rates change
Percentage of sales
Test assumptions constant with sales?
Special cases
Interest - % of total financial liabilities
Adding new L/T assets cost per store?
Tax rate projected EBT
Classification of debt current vs. L/T
Net Sales 3,950.00 100%
Less COGS
Direct Labor 948.00 24%
Materials 592.50 15%
Depreciation 130.00 3%
Overhead 743.90 2,414.40 19% 61%
Gross Profit 1,535.60 39%
Selling Expense 392.00 10%
General & admin expense 237.00 629.00 6% 16%
Profit before taxes 906.60 23%
Federal Income taxes 453.30 11%
Net Profit 453.30 11%
Percy-Bowles, Inc.
Pro Forma Operating Statement
For the Fiscal Year Ended August 31, 1961
(Thousands of Dollars)
1.
2.
a. Cash
b. Accounts Receivable
c. Inventories
d. Total current assets
e. Land, buildings, equip., trucks
f. Accumulated depreciation
g. Net fixed assets
h. Other assets
i. Total assets
j. Accounts Payable
k. Note payable- bank
l. Accrued expenses & taxes
m. Total current liabilities
n. Mortgage payable
o. Capital stock
p. Earned surplus
q. Total liabilities & net worth
2.
Hepplefinger & Company
Pro Forma Balance Sheet
June 30, 1961
Cash 40,000 (minimum balance)
Accounts Receivable 103,056 (14/360*2,650,000)
Inventories 258,900 (221,900+2,475,000-2,438,000)
Total current assets 401,956
Land, buildings, equip., trucks 125,400 (111,400+4,000+10,000)
Accumulated depreciation 82,000 (73,700+8,300)
Net fixed assets 43,400
Other assets 5,100
Total assets 450,456
Accounts Payable 171,875 (25/360*2,475,000)
Note payable- bank 141,681 (plug figure)
Accrued expenses & taxes 11,300 (same)
Total current liabilities 324,856
Mortgage payable 22,500 (24,000-1,500)
Capital stock 75,000 (same)
Earned surplus 28,100 (25,300+5,300-2,500)
Total liabilities & net worth 450,456
3.
a. Sales
b. Less: Cost of Goods Sold
c. Direct Labor
d. Materials
e. Depreciation
f. Overhead
g. Total Cost of Goods Sold
h. Gross Margin
i. Sales & administrative expense
j. Earnings before taxes
k. Income tax
l. Net Profit
3b.
a. Cash
b. Accounts receivable
c. Inventories
d. Total current assets
e. Machinery & equipment
f. Accumulated depreciation
g. Net fixed assets
h. Other assets
i. Total assets
j. Accounts payable
k. Accrued wages
l. Accrued taxes
m. Total current liabilities
n. Long Term Debt
o. Capital stock
p. Earned surplus
q. Total liabilities & net worth
3.
IDEAS, INC.
Pro Forma Operating Statement
For the Six Months Ended
(Thousands of dollars)
Sales 600 (100*6)
Less: Cost of Goods Sold
Direct Labor 120 (20*6)
Materials 160 (40*6-80)
Depreciation 12 (2 per month*6)
Overhead 168 (25/month*6+3/month)
Total Cost of Goods Sold 460
Gross Margin 140
Sales & administrative expense 108 (18*6)
Earnings before taxes 32
Income tax 16 (50% of profit)
Net Profit 16
3.
IDEAS, INC.
Pro Forma Balance Sheet
At the end of six months
(Thousands of dollars)
Cash 15 (given)
Accounts receivable 133 (600/180*40)
Inventories 80 (20+60)
Total current assets 228
Machinery & equipment 60 (given)
Accumulated depreciation 12 (2 per month*6)
Net fixed assets 48
Other assets 5 (given)
Total assets 281
Accounts payable 40 ( 240/180*30)
Accrued wages 5 (120/6/4)
Accrued taxes 16 (above)
Total current liabilities 61
Long Term Debt 104
Capital stock 100 (55+45)
Earned surplus 16 (above)
Total liabilities & net worth 281
Read Note on Financial Forecasting;
Read Financial Forecasting Problems;
Assign #10 - Tire City Case (due 3/10, 3/11)
Extra credit cash flows from operations '96 and
'97.