Mary Lou Black, M.D., president of Narcolarm, Inc., was in the process of preparing a business plan, including some pro forma (i.e. projected) financial statements, for her new venture [See Narcolarm, Inc. (A)].

Enlisting the help of a niece who had recently completed a course in accounting, Dr. Black first prepared a list of requirements and activities necessary to launch the new enterprise, which she called “Narcolarm, Inc.” These requirements and activities led to the development of an initial balance sheet, shown in Exhibit 1.

Next, again with the help of her niece, Dr. Black projected the activities that would take place during the first year of operations. These are shown in Exhibit 2. She realized that these were overall estimates, and that they would not necessarily occur in the sequence shown, but she felt they were sufficient to allow her to prepare a set of pro forma financial statements for the first year of operations. She planned to produce all Narcolarms to order, so that she would not have to worry about carrying any inventories. The only items in inventory would be the raw materials needed to manufacture the devices.

Assignment

1. Beginning with the balance sheet shown in Exhibit 1, and using up T Accounts, indicate the effect of each of the activities listed in Exhibit 2. For example, Item 1 would result in a debit to Cash of $150,000, a debit to Accounts Receivable of $50,000, and a credit to Retained Earnings of $200,000.
2. Prepare a pro forma balance sheet as of the end of that year.
3. What do you think of Dr. Black's proposed venture?