Carter Corporation\'s sales are expected to increase from $5 million in 2012 to
ID: 2715602 • Letter: C
Question
Carter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by 20%. Its assets totaled $2 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $ Why is this AFN different from the one when the company pays dividends? Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
Explanation / Answer
All asset accounts can be assumed to increase directly as percentage of sales unless the firm is operating at less than full capacity. If the firm is not operating at full capacity, then fixed assets will not vary with directly sales, but the cash, receivable, and inventory accounts will increase as a percentage of sales.
Liabilities, equity, or both must also increase if assets increase.
Certain liability accounts, such as accounts payable and accruals, can be expected to increase spontaneously with sales. These are spontaneously generated funds, obtained automatically from routine business transactions.
Retained earnings will increase, but not proportionally with sales. The new retained earnings will be determined from the projected income statement.
Formula and Calculation
Additional funds needed (AFN) is calculated as the excess of required increase in assets over the increase in liabilities and increase in retained earnings.
Additional Funds Needed = Ao ×
S
Lo ×
S
× S1 × PM × b
So
So
Where,
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
2012
2013
Sales
5,000,000
6,000,000
Assets
2,000,000
2,400,000
Accounts Payables
250,000
300,000
Notes Payables
500,000
600,000
Accrued Liabilities
250,000
300000
Profit Margin
180000
AFN=$4,00,000-$50,000-$1,00,000-$50,000-$180000
AFN=$20,000
Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
Additional Funds Needed = Ao ×
S
Lo ×
S
× S1 × PM × b
So
So
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.