Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average. The firm is expecting a 40 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

Income Statement
Sales	$	280,000
Expenses		220,600
Earnings before interest and taxes	$	59,400
Interest		8,900
Earnings before taxes	$	50,500
Taxes		16,900
Earnings after taxes	$	33,600
Dividends	$	11,760

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	6,000	Accounts payable	$	21,200
Accounts receivable		44,000	Accrued wages		2,150
Inventory		62,000	Accrued taxes		4,650
Current assets	$	112,000	Current liabilities	$	28,000
Fixed assets		99,000	Notes payable		8,900
			Long-term debt		24,500
			Common stock		123,000
			Retained earnings		26,600
Total assets	$	211,000	Total liabilities and stockholders' equity	$	211,000

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)

The firm

has/needs

In external funds / In surplus funds

Answer 1

$ 280,04 AFN A/SO)AS-(L/SO)AS-MS1(RR) A- Assets tied directly to sales $ L-spontaneous liabilities that are affected by sales | $ So the previous year's sales Si total projected sales for next year AS the change in sales between SO and Si $ MS1 projected net income $ RR the retention ratio from net income S 112,000 28,000 280,000 392,000 =280000*(1+40%) 112,000 392000-280000 47,040 =392000* (33600/280000) 65% =(33600-11760)/33600 External financing needed (EFN): 3,024 (112000/280000)x112000-(28000/280000)x112000-392000x12%x65% The firm needs $3,024 in external funds

*Please rate thumbs up