To create the pro forma operating statement we used ratios of COGS/Sales and Operating Expense/Sales for years 2004, 2005, and 2006. We then took the average of these ratios and multiplied them by sales for 2007 to come up with 2007 COGS and Operating Expenses. To calculate interest expense we included the outstanding loan Jones has with Verden and the new line of credit he would be taking out with Southern Bank and Trust. We calculated Verden’s interest expense by multiplying the rate of 8% by the outstanding amount of $134,000. We also assumed Jones would use the maximum amount of $350,000 on his line of credit to support his rapidly growing business. In addition to the $350,000 limit, the bank also limits his ability …show more content…
By averaging these ratios and multiplying by the expected 2007 sales, we were able to find the 2007 Cash, Accounts Receivable, Inventory and Property and Equipment. To calculate Accumulated Depreciation, we assumed that the increase in $8,000 between the end of 2006 and the first quarter of 2007 would remain constant throughout the rest of the year resulting in a $32,000 increase in Accumulated Depreciation in …show more content…
After conducting this analysis we found out that Jones will need a line of credit payable of $410,540. Therefore, Jones’ line of credit payable will be $350,000 as that is the maximum amount Southern Bank & Trust will allow Jones to take out.
Long Term Debt is $110,000 at 2007 year end. Back in 2003, Jones bought out Verden from the company for $250, 000. Under their agreement, Jones would pay Verden the $250,000 in installments of $2,000 per month plus interest of 8% per year. In year 2006, the loan outstanding was $134,000 so in 2007 he should pay another installment of $24,000 making the year end balance $110,000. Therefore, current long term debt is $24,000.
The Net Worth account is essentially retained earnings. To calculate this amount we took the Net Worth balance in 2006 of $243,000 and added Net Income from 2007 of $36,000 which is $279,000 at year end of 2007. This is consistent with how Net Worth is calculated in the years from