Karen Lamont is in the process of starting a new business and wants to forecast the first year’s income statement and balance sheet. She has made a number of assumptions, which are shown below:
- Lamont has projected the firm’s sales will be $1 million in the first year.
- She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively.
- For working capital, Lamont has estimated the following:
- Accounts receivable as a percentage of sales: 12%
- Inventory as a percentage of sales: 15%
- Accounts payable as a percentage of sales: 7%
- Accruals as a percentage of sales: 5%
- A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate.
- The firm’s tax rate will be 30 percent.
- Lamont will need to purchase $350,000 in plant and equipment.
Lamont will provide any other financing needed.
Question 1 Based on Lamont’s assumptions prepare a pro forma income statement and balance sheet.
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