3
CASE STUDY
Instruction:
Review the following 2015 Balance Sheet and Income Statement for T. F. Baker
Cosmetics, Inc.
T.F. Baker Cosmetics, Inc.
Balance Sheet
As of December 31, 2015
ASSETS
Current Assets:
Cash
Accounts Receivable
Inventory
Total Current Assets
5,000,000
12,500,000
10,000,000
27,500,000
Non-Current Asset:
Gross Fixed Asset
Accumulated Depreciation
65,000,000
30,000,000
Total Assets
35,000,000
P
62,500,000
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accounts Payable
Short Term Bank Loan
Total Current Liabilities
10,000,000
15,000,000
25,000,000
Non-Current Liability:
Long-Term Debt
Shareholders Equity:
Common Stock
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity
10,000,000
15,000,000
12,500,000
27,500,000
P 62,500,000
T.F. Baker Cosmetics, Inc.
Income Statement
For the year ended December 31, 2015
Net Sales
Cost of goods sold
Gross profit
Expenses:
Operating Expenses
Depreciation Expense
Interest Expense
P 150,000,000
(120,000,000)
30,000,000
15,000,000
5,000,000
2,000,000
22,000,000
Income before Tax
Income Tax Expense (35%)
Net Income
8,000,000
(2,800,000)
P
5,200,000
Additional Information:
At a recent board meeting, the firm set the following objectives for 2016:
1) The firm would increase liquidity. For competitive reasons, accounts receivable and
inventory balances were expected to continue their historical relationships with sales and
cost of goods sold, respectively, but the Board felt that the company should double its
cash holdings.
2) The firm would accelerate payments to suppliers. This would have two effects. First, by
paying more rapidly, the firm would be able to take advantage of early payment
discounts, which would increase its gross margin from 20 percent to 22 percent. Second,
by paying earlier, the firms accounts payable balance, which historically averaged about
one twelfth of cost of goods sold, would decline to 4 percent of cost of goods sold.
3) The firm would expand its warehouse, which would require an investment in fixed assets
of P10,000,000. This would increase projected depreciation expense from P5,000,000 in
2015 to P7,000,000 in 2016.
4) The firm would issue no new common stock during the year, and it would initiate a
dividend payments in 2016 would total P1,200,000.
5) Operating expenses would remain at 10% of sales.
6) The firm did not expect to retire any long-term debt, and it was willing to borrow up to
the limit of its current credit line with the bank, P20,000,000. The interest rate on its
outstanding debts would average 8%.
7) The firm set a sales target for 2016 of P200,000,000.
Requirement: Develop a set of Pro Forma Financial Statements to determine whether or not T.F.
Baker Cosmetics can achieve all these goals simultaneously.
ANSWERS
T.F. Baker Cosmetics, Inc.
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
Less: Expenses:
Operating Expense
Depreciation Expense
Operating Profit
Interest Expense
Income before Tax
Income Tax Expense
NET INCOME
2015
150,000,000
(120,000,000)
30,000,000
2016
200,000,000
(156,000,000)
44,000,000
(15,000,000)
(5,000,000)
10,000,000
(2,000,000)
8,000,000
(2,800,000)
5,200,000
(20,000,000)
(7,000,000)
17,000,000
(2,400,000)
14,600,000
(5,110,000)
9,490,000
T.F. Baker Cosmetics, Inc.
Balance Sheet
Current Assets
Cash
Accounts Receivable
Inventory
Non-current Assets:
Gross Fixed Asset
Accumulated Depreciation
TOTAL ASSETS
Current Liabilities:
Accounts Payable
Short Term Bank Loan
Non-current Liabilities:
Long-Term Debt
Shareholders Equity:
Common Stock
Retained Earnings
*External Financing Required
TOTAL LIABILITIES and SHAREHOLDERS
EQUITY
SOLUTIONS
2015
2016
5,000,000
12,500,000
10,000,000
10,000,000
16,666,667
13,000,000
65,000,000
(30,000,000)
62,500,000
75,000,000
(37,000,000)
77,666,667
10,000,000
15,000,000
6,240,000
20,000,000
10,000,000
10,000,000
15,000,000
12,500,000
15,000,000
20,790,000
5,636,667
77,666,667
62,500,000
COST OF GOODS SOLD
Sales
2015
Gross
Profit
Gross
Margin
150,000,00
0
30,000,000
Sales
2016
Gross
Margin
Gross
Profit
200,000,00
0
22%
Sales
2016
COGS
(squeeze)
Gross
Profit
200,000,00
0
156,000,00
0
44,000,000
20%
=5,000,000 x 2
=10,000,000
ACCOUNTS RECEIVABLE
PERCENTAGE OF SALES
= ACCOUNTS RECEIVABLE
2015 / SALES 2015
=12,500,000 / 150,000,000
=0.8333333333 OR 8.33333333%
ACCOUNTS RECEIVABLE
=SALES 2016 X 8.3333%
=200,000,000 X 8.33333%
=16,666,667
INVENTORY
PERCENT OF COGS
=10,000,000 / 120,000,000
=0.08333333 OR 8.333333%
INVENTORY 2016
=COGS 2016 X 0.8333333%
=156,000,000 X 0.83333333%
=13,000,000
GROSS FIXED ASSET
65,000,000 + 10,000,000
=75,000,000
ACCUMULATED
DEPRECIATION
=30,000,000 + 7,000,000
=37,000,000
ACCOUNTS PAYABLE
=COGS X 4%
=156,000,000 X 4%
=6,240,000
SHORT TERM BANK LOAN
The firm was willing to borrow up to
the limit of its credit line with the
bank, 20,000,000
RETAINED EARNINGS
=RETAINED EARNINGS 2015 +
NET PROFIT DIVIDEND
PAYMENT
=12,500,000 + 9,490,000
1,200,000 =20,790,000
44,000,000
OPERATING EXPENSES
=SALES 2016 X 10%
=200,000,000 X 10%
=20,000,0000
CASH
INTEREST EXPENSE
=OUTSTANDING DEBTS X 8%
=(SHORT TERM BANK LOAN +
LONG TERM DEBT) X 8%
=(20,000,000 + 10,000,000) X 8%
=2,400,000
INCOME TAX EXPENSE
=INCOME TAX EXPENSE 2015
/INCOME BEFORE TAX 2015
=2,800,000 / 8,000,000
=0.35 OR 35%
INCOME TAX EXPENSE 2016
=14,600,000 X 35%
=5,110,000
