XYZ Company has assets that are traditionally 80% of sales, and its liabilities traditionally are 30% of sales. Sales for this year are $70,000 and sales for next year are projected to be $120,000 with a profit margin of 6%. No owner payout will be taken. Using the percentage of sales method, XYZ will need
A) $7,200
B) $25,000
C) $17,800
D) $30,000 of additional financing.
E) No financing is required.

Question

Quizplus · Accepted Answer

For next year, assets = 120,000 * 80% = $96,000, liabilities = 120,000 * 30% = $36,000. Equity increases by profit = 120,000 * 6% = $7,200. The financing gap = New assets - (New liabilities + New equity) = $96,000 - ($36,000 + $7,200) = $52,800 - $43,000 = $9,800. However, this year's assets = 70,000 * 80% = $56,000, and liabilities = 70,000 * 30% = $21,000. The increase in assets needed is $96,000 - $56,000 = $40,000, and the increase in liabilities is $36,000 - $21,000 = $15,000. So, the additional financing needed = Increase in assets - Increase in liabilities = $40,000 - $15,000 = $25,000. Given the discrepancy in the calculation explanation and the chosen answer, the correct calculation should reflect the need for additional financing based on the projected increase in assets and liabilities, taking into account the profit that increases equity. The correct calculation approach involves determining the net increase in assets and liabilities and then accounting for the profit as additional equity, which would reduce the need for external financing. The initial explanation mistakenly subtracted the new equity from the financing gap instead of adding it to the liabilities to cover the new assets. The correct approach to find the additional financing needed involves accurately calculating the difference between the projected increase in assets and the sum of the increase in liabilities and the retained profits.

XYZ Company Has Assets That Are Traditionally 80% of Sales