Question

A firm has the following account balances for this year. Sales for the year are $500,000. Projected sales for next year are $545,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $5,000 next year. Retained earnings is expected to increase by $3,500 next year. What is the projected external financing need?

a) $10,520
b) $14,720
c) $18,520
d) $20,720
e) $25,620

Answer 1

b) $14,720

Step-by-step explanation:

Note: The missing words are attached below for understanding

Determining the increase in the sales:

Percentage increase in sales = (New sales - Old sales) / Old sales

= ($545,000 - $500,000) / $500,000

= 9%

Determining the new balances of assets and liabilities:

Current assets = $48,000*109% = $52,320

Fixed assets = 158000*109% = $172,220

Total assets = $52,320 + $172,220 = $224,540

Financed by:

The current liabilities = $48000*109% = $52,320

Long-term debt = $83,000 - $5,000 = $78,000

Common stock = $36,000

Retained earnings = $40,000 + $3,500 = $43,500

Total liabilities & the equity = $52,320 + $78,000 + $36,000 + $43,500 = $209,820

External financing needed = Total assets - Total liabilities and equity

External financing needed = $224,540 - $209,820

External financing needed = $14,720