Question 8 You are comparing the current financial statements of a firm to the p

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Question 8 You are comparing the current financial statements of a firm to the pro forma statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true? O Projected dividends equal the current cash dividend amount. Depreciation will decrease by four percent. ORetained earnings will increase by 85 percent of projected net income. O Total assets will increase by less than four percent. O Total liabilities and owners' equity will increase by four percent.

Explanation / Answer

Question:- You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true

Answer:- Total assets will increase by less than four percent.

Reason:-  A pro forma financial statement can be seen as one which is based on certain assumptions and projections. As the current pro forma is ex[ecting a 4% increase and capacity of 85% thus Total assets will increase by less than four percent.

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