Question

3. Any forecast of financial requirements involves la determining how much money the firm will the same period, and (c) subtracting the funds generated from the funds required to determine the external financial requirements. The projected financial statement method is straightforward, one simply projects the asset requirements for the coming period, then projects the abilities and equity that will be generated under normal operations, and subtracts the projected lates/capital from the required assets to estimate the additional funds needed. (AFN) 3.1. Financial Forecasting (Percent of Sales Method) ABC Company has the following financial statements which are representative of the firm's historical average INCOME STATEMENT Sales 22,000,000 Cost of sales 1,290,000 Gross Profit 300,000 Operating Expenses 380,000 Earnings before interest and taxe 420,000 Interest Expense 70.000 Earnings before taxes 350,000 Taxes (35%) 122.000 Earnings after taxes P227,500 Dividends P136,500 Statement of Financial Position ASSETS Cash P50,000 Accounts receivables 400,000 Inventory 750,000 Current Assets P1,200,000 Fixed Assets 300,000 Total assets P2,000,000 LIABILITIES AND EQUITY Accounts Payables P250,000 Accrued wages 10,000 Accrued taxes 20,000 Current liabilities 280,000 Notes Payable-bank 70,000 Long-term debt 150.000 Ordinary shares 1,200,000 Retained earnings 300,000 Total liabilities and equity P2,000,000 The firm is expecting a 20 percent increase in sales nest year, and management is concerned about the firm's need for external funds. The increase in sales is expected to be carried out without any expansion of the fined assets, but rather through more efficient asset utilization in the existing store. Among liabilities only current abilities vary directly with sales. 3.2. Using percent-of-sales method, determine whether the firm has external financing needs or a surplus of funds. 3.3. Supporting computations 3.3.1. Cash 2.5% XP2.4M sakes 3.3.2. Accounts receivables - 20% of P2.4M 3.3.3. Inventory - 37.5% x P2.4M 3.3.4. No percentages are computed for fixed assets, notes payable, long-term debt, ordinary shares and retained earnings because they are not assumed to maintain a direct relationship with sales volume. For simplicity, depreciation is not explicity considered 3.3.5. Accounts payable 12.5% of P2.4M 3.3.6. Accrued expenses 0.5% of P2.4M 3.3.7. Accrued taxes - 1 of P2.4M 3.3.8. Retained earning-P100,000P282,100 P101,600

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Answer 1

Determination whether Firm has External Financial needs or a surplus of funds:-

Assets	Historical Amount	Amount After Change Requirement
Cash	50,000	60000 (2.5%*2400000)
Account Receivables	400,000	480000(20%*2400000)
Inventory	750,000	900000(37.5%*2400000)
Current Assets	1,200,000	1440000
Fixed Assets	800,000	800000 (No Change-given)
Total	2,000,000.00	2,240,000.00
Liabilities & Equity	Historical Amount	Amount After Change Requirement
Account Payable	250,000	300000(12.5%*2400000)
Accrued Wages	10,000	12000(.5%*2400000)
Accrued Taxes	20,000	24000(1%*2400000)
Current Liabilities	280,000	336000(20%*2400000)
Notes Payable Bank	70,000	70000(No Change)
Long Term Debts'	150,000	150000(No Change)
Ordinary Shares	1,200,000	1200000(No Change)
Retained Earning	300,000	483700(Given)
Total	2,000,000.00	2,239,700.00

If we compare Assets and Liabilities we have surplus assets by 300. That means no external funding is required. We have generated sufficient cash from from the business to pay the liabilities.

Disclaimer:- The above answer is based on the supporting calculations given in the question.There is possibility of alternate answer, if we consider Income Statements changes i.e. amount transferred to Retained Earnings after paying the dividends to existing Ordinary shareholders.