After-Class Exercise for the Preparation of Pro Forma Financial Statements

You are a financial analyst covering the stock of New Age Sporting Goods Inc. (NASG), a retailer of sporting goods operating in the northeast region. One of your clients, a large institutional investor from Asia, has recently requested a detailed investment report about NASG. In the request, this client specifically asked that the report include the pro forma financial statements for the year 2012. Below are the actual income statement and balance sheet for New Age Sporting Goods Inc. (NASG) for the year 2011.

Income Statement for the Year 2011(In thousands)

Sales Revenue $83,412

Expenses: Cost of Goods Sold 65,586 Marketing and Administrative 12,858 Interest 706 Income Taxes 1,581 Total Expenses 80,731 Net Income $2,681

Balance Sheet as of the End of Year 2011(In thousands)

Cash $45 Accounts Receivable 700 Inventories 14,064 Prepayments 529 Total Current Assets 15,338 Property, Plant, and Equipment (net) 15,874 Other Assets 1,607 Total Assets $32,819

Accounts Payable $5,907 Notes Payable 1,882 Other Current Liabilities 2,184 Total Current Liabilities 9,973 Long-term Debt 9,709 Other Noncurrent Liabilities 411 Total Liabilities $20,093 Common Stock 230 Additional Paid-in Capital 539 Retained Earnings 11,957 Total Shareholders' Equity 12,726 Total Liabilities and SE $32,819

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Based on your thorough research on the business of NASG and its operating environment, you have set up the following assumptions about NASG’s operation, investment, financing, and other activities for the year 2012.

1. Sales will grow 22%2. Cost of goods sold will equal 78.6% of sales3. Selling and administrative expenses will equal 15.5% of sales4. Interest expense will equal 7% of average interest-bearing debt5. Income tax expense will equal 37% of income before income taxes6. Cash will equal the amount necessary to equate total assets with total liabilities plus

shareholders' equity7. Accounts receivable will increase at the growth rate in sales8. Inventory will turn over 5.2 times per year9. Prepayments will increase at the growth rate in sales10. Plant assets (net) will grow at 18.9% per year11. Other assets will increase at the growth rate in sales12. Accounts payable will turn over 13.0 times per year13. Notes payable will increase to $2,000 million in the year 2012 and thereafter increase

$100 million each year14. Other current liabilities will grow at the growth rate in sales15. Long-term debt will grow at the growth rate in property, plant, and equipment16. Other non-current liabilities will increase at the growth rate in sales17. Common stock and additional paid-in capital will not change18. Dividends for the year 2011 were $391 and will increase at a 25% growth rate19. Depreciation expense for the year 2011 was $649 and will increase at the growth rate in

property, plant, and equipment20. The change in Other Noncurrent Assets is an investing activity21. The change in Other Noncurrent Liabilities is an operating activity.

Requirement:

(1) Prepare a pro forma income statement, balance sheet, and statement of cash flows for NASG for the year 2012.

(2) After you have prepared the pro forma statement of cash flows, do you see the need to revise some of the assumptions you have made? Which assumptions? Explain your decision.

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