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?
A)The projected net income is equal to the current year's net income.
B)The tax rate will increase at the same rate as sales.
C)Retained earnings will increase by four percent over its current level.
D)Total assets will increase by less than four percent.
E)Total liabilities and owners' equity will increase by four percent.

Question

Quizplus · Accepted Answer

Since the firm is currently operating at 85% capacity, it can increase sales by 4% without needing to increase total assets by the same percentage. Thus, total assets will increase by less than 4%.

You Are Comparing the Current Income Statement of a Firm