Solution_Week1 Chapter 4 Wilmington University IST 7000

Consider the following simplified financial statements for the Fire Corporation (assuming no income
taxes):

Income Statement Balance Sheet
Sa As De
$ 32,800 $ 25,950 $ 6,450
les sets bt
Co Eq
26,290 19,500
sts uity

N
et T T
$ 6,510 $ 25,950 $ 25,950
inco otal otal
me




The company has predicted a sales increase of 12 percent. It has predicted that every item on the
balance sheet will increase by 12 percent as well.

Create the pro forma statements and reconcile them.

Steps to Solution:
1. Multiply sales and costs by 1.12 (12% increase)
2. Multiply every item on Balance sheet also by 1.12 (12% increase)

Pro forma income statement Pro forma balance sheet
$ $ $
Sales 36736 Assets 29064 Debt 7224

Costs 29445 Equity 21840


$ $ $
Net income 7291 Total 29064 Total 29064




What is the plug variable?
Steps to Solution:
1. Net income increases by 781
2. Equity increases by 2,340 (21,840 – 19,500)
3. This increase is the retained earnings
4. Hence plug variable is the retained earnings of 1,559 (2,340 – 781)
The plug variable is in the amount of $ .
retained earnings 1559




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