Percent of sales method The first step in to express the balance of an accounting item in the income statement or balance sheet as a percent of current sales revenue. Then multiply that percentage by the projected sales revenue to arrive the projected amount for an accounting item in the coming year. For example, KMS' costs except depreciation were $58,413, which accounted for 78% of current year's sales revenue ($58,413/$74,889 = 78%). The projected costs except depreciation for the upcoming year will be 78% x $89,866.80 (the projected sales revenue) $70,095.60. Some of the accounting items expressed as a percentage of sales are meaningless. This is because either the balance of the accounting item remains unchanged or its proportional change does not correspond to the percentage change in sales. We put a “n.a.” in the percentage column. We assume that KMS' dividend payout ratio remains unchanged for the coming year. Given the $2,776.28 dividends and net income of $6,940.70 from the income statement, we know that its dividend payout ratio is cash dividend net income = $2,776.28/$6,940.70 40%. This implies that KMS' retention ratio is 60%, as the sum of the dividend payout and retention ratios equals to 100% The textbook provides the formula for the projected retained earnings The projected retained earnings The retained earnings from the past year + projected net income -projected cash dividends to be paid Therefore, you will use the dividend payout ratio in the calculations. You will find that the pro forma balance sheet is imbalanced as total assets are not equal to total liabilities and stockholders' equity. If the projected total assets exceed projected total liabilities and stockholders' equity, this indicates that external financing is needed. Please compute the needed amount from external financing. KMS Designs Inc. Balance Sheet As of 12/31/2018 $ Liabilities and Stockholders' Equity Sales in 2018 Assets 74,889 $ Percentage of Sales Percentage of Sales Current assets Current liabilities $11,982 $2,000 $13,982 $2,500 $11,982 Cash Accounts payable Notes payable Accounts receivable 14,229 n.a Total Inventory 14,978 n.a Long-term debt Stockholders' equity Common stock and paid-in surplus Retained earnings $41,189 Total n.a Fixed assets $49,427 $65,213 Net plant and equipment n.a 8,921 n.a $74,134 $90,616 Total n.a. Total assets $90,616 Total liabilities and stockholders' equity n.a KMS Designs Inc. Pro Forma Balance Sheet Liabilities and Stockholders' Equity $0 Projected sales in 2019 Assets Current ass ets Current liabilities Accounts payable Cash Notes payable Accounts receivable Inventory Total Long-term debt Stockholders' equity Common stock and paid-in surplus Total Fixed assets Net plant and equipment Retained earnings Total Total liabilities and stockholders' equity Total assets External financing needed FFF F
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