Keith Corporation Balance Sheets Keith Corporation Income Statement Data (2015)

December 31 Depriciation expense

Assets 2015 2014 EBIT
Cash 1,500 1,000 Interest expense
Marketable securities 1,800 1,200 Net profit after taxes
Acounts receivables 2,000 1,800 Tax rate
Inventories 2,900 2,800
Total Current Assets 8,200 6,800 Net operating profit after taxes
Gross fixed assets 29,500 28,100 Operating Cash Flow
Less: Accumulated depriciation 14,700 13,100 Free cash flow
Net fixed assets 14,800 15,000 Net Fixed Asset Investment (NFAI)
Total Assets 23,000 21,800 Net Current
Keith Asset Investment
Corporation (NC
generates significant positive cash flows
Liabilities and Stockholders Equity The FCF value is very important because it demonstrates th
from operations are sufficient to cover both operating expe
Accounts payable 1,600 1,500 investment in fixed and current assets.
Notes payable 2,800 2,200
Accruals 200 300
Total Current Liabilities 4,600 4,000
Long-term debt 5,000 5,000
Total Liabilities 9,600 9,000
Common stock 10,000 10,000
Retained earnings 3,400 28,000
Total stockholders' equity 13,400 38,000
Total Liabilities and Stockholders' Equity 23,000 47,000
tion Income Statement Data (2015)
1,600
2,700
367
1,400
40%

EBIT*(1-tax rate) 1,620

NOPAT+Depreciation 3,220
420
1,400
erates significant positive cash flows 1,400
from operations.
important because it demonstrates that the cash flows
fficient to cover both operating expenses and
d current assets.
On December 31, 2020, John Welsh self employed certified public accountant (CPA), completed her first f
CPA), completed her first full year in business. During the year, he billed $400,000 for her accounting services. He ha
accounting services. He had two employees, a bookkeeper and a clerical assistant. In addition to her monthly salary o
tion to her monthly salary of $8,000, Mr. Welsh paid annual salaries of $50,000 and $35,000 to the bookkeeper and t
00 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Mr. Welch and h
t costs for Mr. Welch and her employees totaled $34,600 for the year. Expenses for office supplies, including postage
supplies, including postage, totaled $10,400 for the year. In addition, Mr. Welch spent $17,000 during the year on tax
000 during the year on tax-deductible travel and entertainment associated with client visits and new business develo
and new business development. Lease payments for the office space rented (a tax-deductible expense) were $2,70
tible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the
tures was $15,600 for the year. During the year, Ms. Welch paid interest of $15,000 on the $120,000 borrowed to sta
e $120,000 borrowed to start the business. He paid an average tax rate of 30% during 2020. Calculate Net profits afte
0. Calculate Net profits after taxes for Mr. Welch, CPA, for the year ended December 31, 2020.
 Percent of sales Pro Forma Income Statement
Pessimistic Most Likely Optimistic
Sales Revenue 937500 900000 1125000 1280000
Cost of goods sold -421875 45% -405000 -506250 -576000
Gross Profit 515625 495000 618750 704000
Operating expense -234375 25% -225000 -281250 -320000
Operating Profit
281250 270000 337500 384000
Interest expense -30000 3% -28800 -36000 -40960
Net profit Before
Taxes 251250 241200 301500 343040
Taxes (rate=25%) -62812.5 7% -60300 -75375 -85760
Net profit After
Taxes 188437.5 180900 226125 257280

The  percentage-of-sales method assumes that all costs are variable. In reality, some costs will be fixed. In the pessimistic ca

Allen Products, Inc, Income Pro Forma Income Statement

Statement for the Year
Ended December 31, 2015 Percent of sales Pessimistic Most Likely Optimistic
Sales Revenue 937500 900000 1125000 1280000
Cost of goods sold -421875 -415000 -456250 -484667
fixed Cost of Goods -250000 -250000 -250000 -250000
Variable Cost of Goods -171875 18% -165000 -206250 -234667
Gross Profit 515625 485000 668750 795333.3
Operating expense -234375 25% -232200 -245250 -254240
ed Operating expenses -180000 -180000 -180000 -180000
le Operating expenses -54375 6% -52200 -65250 -74240
Operating Profit
281250 252800 423500 541093.3
Interest expense ( -30000 3% -30000 -30000 -30000
Net profit Before
Taxes 251250 222800 393500 511093.3
Taxes (rate=25%) -62812.5 7% -55700 -98375 -127773
Net profit After
Taxes 188437.5 167100 295125 383320

Part a's profits exceed those of Part c.  the optimistic case in part a has a lower profit than part c. This
finding confirms the findings in part b.
be fixed. In the pessimistic case, this assumption causes all costs to decrease with lower sales levels when, in reality, the fixed portion o
, in reality, the fixed portion of costs will not decrease. The opposite is true for the optimistic forecast because the percentage-of-sales a
cause the percentage-of-sales assumes that all costs will rise when, in reality, only the variable portion will. In the pessimistic case, this
ill. In the pessimistic case, this pattern results in an understatement of costs and an overstatement of profits. In the optimistic scenario,
fits. In the optimistic scenario, the opposite occurs
 Peabody ^ Peabody Balance Sheet Decemver 31, 2015 (000$)
Assets
Cash 400
Marketable securities 200
Acounts receivables 1200
Inventories 1800
Total Current Assets 3600
Net fixed assets 4000
Total Assets 7600
Liabilities and Stockholders Equity
Accounts payable 1400
Accruals 400
Other current liabilities 80
Total Current Liabilities 1880
Long-term debt 2000
Total Liabilities 3880
Common equity 3720
Total Liabilities and Stockholders' Equity 7600

Pro Forma Balance Sheet

Assets
Cash 480
Marketable securities (Fixed) 200
Acounts receivables (W1) 1440
Inventories (W1) 2160
Total Current Assets 4280
Net fixed assets 4820
Total Assets 9100
Liabilities and Stockholders Equity
Accounts payable (W1) 1680
Accruals 500
Other current liabilities (Fixed) 80
Total Current Liabilities 2260
Long-term debt 2000
Total Liabilities 4260
Common equity (W2) 4065
Financing Needs 775
Total Liabilities and Stockholders' Equity 9100

Peabody & Peabody requires an additional 775,000 dollars to operate the

company based on the constraints and projections provided.
 Percentage
2015 2016 2017
to Sales
sales 10,000 11000 12000
Accounts receivable 12% 1,200 1320 1440
Inventory 18% 1,800 1980 2160
Accounts payable 14% 1,400 1540 1680
net profit margin 3% 300 330 360

2015 2016 2017

Net Profit 300 330 360
dividends Paid 150 -165 -180
Common Equity (for December 31) 3720 3885 4065