Balance Sheet and Net Income

Only available on StudyMode
  • Download(s) : 1268
  • Published : May 6, 2012
Open Document
Text Preview
Consider the following simplified financial statements for the Phillips Corporation (assuming no income taxes):|

Income Statement| Balance Sheet|
  Sales| $17,000  |   Assets| $13,127  |   Debt| $7,541  |   Costs| 11,730  |  |  |   Equity| 5,586  |
    Net income| ------------------------------------------------- $5,270  |     Total| ------------------------------------------------- $13,127  |     Total| ------------------------------------------------- $13,127  |

|
 
Phillips has predicted a sales increase of 11 percent. It has predicted that every item on the balance sheet will increase by 11 percent as well. Create the pro forma statements and reconcile them. (Do not include the dollar signs ($). Round your answers to the nearest whole dollar amount. (e.g., 32))|

Pro Forma Income Statement| Pro Forma Balance Sheet|
  Sales| $  |   Assets| $  |   Debt| $  |
  Costs|  |  |  |   Equity|  |
  Net income| ------------------------------------------------- $  |   Total| ------------------------------------------------- $  |   Total| ------------------------------------------------- $  |

|

  The plug variable here is dividends paid in the amount of $.|

 
Explanation:
 
It is important to remember that equity will not increase by the same percentage as the other assets. If every other item on the income statement and balance sheet increases by 11 percent, equity must be:|

Equity = Total liabilities and equity − Debt|
Equity = $14,571 − 8,371|
Equity = $6,200|

Equity increased by:|

Equity increase = $6,200 − 5,586|
Equity increase = $614|

Net income is $5,850 but equity only increased by $614; therefore, a dividend of:|

Dividend = $5,850 − 614|
Dividend = $5,236|

must have been paid. Dividends paid is the plug variable.|

Consider the following simplified financial statements for the Phillips Corporation (assuming no income taxes):|

  Income Statement| Balance Sheet|
  Sales| $19,000  |   Assets| $9,000  |   Debt| $5,700  |   Costs| 14,100  |  |  |   Equity| 3,300  |   Net income| ------------------------------------------------- $4,900  |   Total| ------------------------------------------------- $9,000  |   Total| ------------------------------------------------- $9,000  |

|
 
Phillips has predicted a sales increase of 10 percent. It has predicted that every item on the balance sheet will increase by 10 percent as well.|

Required:|
Calculate the dividend paid. (Do not round your intermediate calculations.)|  

| $5,050 |
| $5,043 |
| $15,890 |
| $5,060 |
| $5,047 |

 
It is important to remember that equity will not increase by the same percentage as the other assets. If every other item on the income statement and balance sheet increases by 10 percent, the pro forma income statement and balance sheet will look like this:|

  Pro forma income statement| Pro forma balance sheet|
  Sales| $20,900  |   Assets| $9,900  |   Debt| $6,270  |   Costs| 15,510  |  |  |   Equity| 3,630  |   Net income| ------------------------------------------------- $5,390  |   Total| ------------------------------------------------- $9,900  |   Total| ------------------------------------------------- $9,900  |

|
 
In order for the balance sheet to balance, equity must be:|

Equity = Total liabilities and equity – Debt|
Equity = $9,900 – 6,270|
Equity = $3,630|

Equity increased by:|

Equity increase = $3,630 – 3,300|
Equity increase = $330|

Net income is $5,390 but equity only increased by $330; therefore, a dividend of:|

Dividend = $5,390 – 330|
Dividend = $5,060|

must have been paid. Dividends paid is the plug variable.|

 
It is important to remember that equity will not increase by the same percentage as the other assets. If every other item on the income statement and...
tracking img