Reference no: EM131973536

The firm has forecasted sales of $7,100,000 and a tax rate of 40% for 2012. The cost of goods sol... The firm has forecasted sales of $7,100,000 and a tax rate of 40% for 2012. The cost of goods sold in 2012 is expected to change with sales by 105% of the two-year arithmetic average of the proportion of this item in relation to sales. The same formula should be applied for selling and G&A expenses, except that this item is expected to be 95% of the mentioned arithmetic average. On the other hand, accounts receivable, inventory, accounts payable, and accrued expenses are expected to change with sales at the two-year arithmetic average of the proportion of these items in relation to sales. The firm has planned an investment of $500,000 in fixed assets in 2012, with an estimated life of 10 years and no salvage value. These fixed assets will be depreciated using the straight line depreciation method. All other financial statement items are expected to remain constant in 2012. Assume the firm pays 7% interest on short-term debt and 9% on long term debt. Assume that the dividends in 2012 will be the same as those paid in 2011. Using the Elvis Products International example from Chapter 5, respond to the following:1. Fashion Trends, Inc. a regional fashion apparel retailer, wants to prepare a 2012 Pro Forma Income Statement and a 2012 Balance Sheet using the following 2011 and 2010 data: Fashion Trends. Inc. Balance Sheet As of Dec. 31,2011 and 2010 2 2011 2010 4 Assets 5 Cash and Equivalents 6 Accounts Receivable 7 Inventory 8 Total Current Assets 9 Plant & Equipment 10 Accumulated Depreciation 11 Net Fixed Assets 12 Total Assets 13 Liabilities and Owners Equity 14 Accounts Payable 15 Short-term Notes Payable 16 Accrued Expenses 17 Total Current Liabilities 18 Long-term Debt 19 Total Liabilities 20 Common Stock 21 Retained Earnings 22 Total Shareholders Equity 23 Total Liabilities and Owners Equity 862000 678000 1006000 730000 578000 600000 2,446,000 2,008,000 9338000 8644000 4590000 4112000 4,748,000 4,532,000 7,194,000 6,540,000 764000 540000 158000198000 318000 228000 1,240,000 966,000 2046000 1934000 3,286,000 2,900,000 1638000 1616000 2270000 2024000 3,908,000 3,640,000 7,194,000 6,540,000 a. What is the Discretionary Financing Needed (DFN) in 2012? Is this a surplus or deficit? b. Assume that the DFN will be absorbed by long-term debt. Set up an iterative worksheet to eliminate it. c. Assume that the DFN will be absorbed by short-term debt. Set up an iterative worksheet to eliminate it.