Project Income Statement for 1992
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I. Project Income Statement for 1992 to determine net income (or profit after tax) and, therefore, what investment might be made from earnings rather than all new investments having to come from external sources.
Note: A review of previous financial statements shows that all net income since 1987 has been reinvested. That is, the owner has taken none of the profit out. He has “received credit” for leaving these funds in the company as shown by the increases in the “Earned Surplus” line on the Balance Sheet (normally “retained earnings”).
Therefore, assume all net income (or profit after tax) for 1992 is retained in the company.
For 1991, profit margin = (profit after tax) / sales = 2.80%
Use same profit margin to project profit after tax for 1992.
2.80% x $14,500,000 = $406,000
Although the industry average profit margin is 5%, it isnt likely Pop can reverse the negative trend in one year. If the industry average were used, profit = 5.0% x $14,500,000 = $725,000.
II. Project Balance Sheet for (end of) 1992 to determine an estimate of the additional external financing needed. This AFN could be sought through (1) additional investment in equity by owner (same as additional stock sale), (2) additional long-term debt, or (3) additional short-term debt (same as notes payable).
To develop the projected Balance Sheet, the change in assets and the change in liabilities (other than those related to financing) must be estimated. To demonstrate the methodology, assume no net increase in fixed assets is needed and that all other increases are proportional to the increase in sales: (14,500,000 – 12,000,000) / 12,000,000 = 20.83%.
1991
1992
1991
1992
$ 205,100
$ 247,822
$1,550,175
$1,873,076
634,742
766.959
673,130
813,343
3,220,087
3,890,831
75,000
75,000 +ΔNP
$4,059,929
$4,905.612
CL
$2,298,305
$2,761,419 +ΔNP
3,452,383
3,452,383
1,101,600
1,101,600
Equity
1,143,795
1,143,795
Total Assets
$7,512,312
$8,357,995
Earned Surplus 2,968,612
3,374,612
Total Lia. & Eq
$7,512,312
$8,381,426 +ΔNP
Δ (Assets) = Δ (Lia & Eq): $845,683 = $869,114 + ΔNP
Therefore, no new borrowing needed!
Alternate: