Peabody & Peabody has 2012 sales of $10 million. It wishes to analyze expected performance and financing needs for 2014-2 years ahead.

Given the following information, respond to parts a and b. 

(1) The percents of sales for items that vary directly with sales are as follows:

Accounts receivable, 12%

Inventory, 18%

Accounts payable, 14%

Net profit margin, 3%

(2) Marketable securities and other current liabilities are expected to remain unchanged.

(3) A minimum cash balance of $480,000 is desired.

(4) A new machine costing $650,000 will be acquired in 2013, and equipment costing $850,000 will be purchased in 2014. Total depreciation in 2013 is forecast as $290,000, and in 2014 $390,000 of depreciation will be taken.

(5) Accruals are expected to rise to $500,000 by the end of 2014.

(6) No sale or retirement of long-term debt is expected.

(7) No sale or repurchase of common stock is expected.

(8) The dividend payout of 50% of net profits is expected to continue.

(9) Sales are expected to be $11 million in 2013 and $12 million in 2014.

(10) The December 31, 2012, balance sheet follows.

a. Prepare a pro forma balance sheet dated December 31, 2014.

b. Discuss the financing changes suggested by the statement prepared in parta.