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?
$\begin{array}{lrr}
\text {Current assets } &\$48,000\
\text { Net fixed assets } &\$158,000\
\text { Current liabilities } &\$48,000\
\text { Long-term debt } &\$83,000\
\text { common stock} &\$36,000\
\text { Retained earnings } &\$40,000\
\end{array}$

A)$10,520
B)$14,720
C)$18,520
D)$20,720
E)$25,620

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?
$\begin{array}{lrr}
  \text {Current assets  } &\$48,000\
 \text { Net fixed assets } &\$158,000\
 \text { Current liabilities } &\$48,000\
 \text { Long-term debt } &\$83,000\
 \text {  common stock} &\$36,000\
 \text { Retained earnings } &\$40,000\
\end{array}$

A)$10,520
B)$14,720
C)$18,520
D)$20,720
E)$25,620

Quizplus · Accepted Answer

The projected external financing need is calculated by first determining the total financing needed for the projected increase in assets and then subtracting the internal financing available through retained earnings and the reduction in long-term debt.1. Calculate the percentage increase in sales: $(545,000 - 500,000) / 500,000 = 0.09$ or 9%.2. Apply this percentage to all balance sheet accounts that change with sales (current assets and net fixed assets):   - Current assets will increase by $48,000 \times 0.09 = 4,320$.   - Net fixed assets will increase by $158,000 \times 0.09 = 14,220$.3. The total increase in assets is $4,320 + 14,220 = 18,540$.4. Current liabilities are expected to increase by the same percentage as sales because they change with sales: $48,000 \times 0.09 = 4,320$.5. The total financing needed is the increase in assets minus the increase in current liabilities: $18,540 - 4,320 = 14,220$.6. Subtract the internal financing available:   - Reduction in long-term debt: $5,000$.   - Increase in retained earnings: $3,500$.7. The total internal financing is $5,000 + 3,500 = 8,500$.8. The projected external financing need is the total financing needed minus the internal financing: $14,220 - 8,500 = 5,720$.It appears there was a mistake in my calculations. Let's correct the approach:1. Calculate the total assets for next year: Current assets and net fixed assets will increase by 9%, so:   - Projected current assets: $48,000 \times 1.09 = 52,320$.   - Projected net fixed assets: $158,000 \times 1.09 = 172,220$.   - Total projected assets: $52,320 + 172,220 = 224,540$.2. Calculate the total liabilities and equity for next year, excluding long-term debt and common stock since they do not change with sales:   - Current liabilities will increase by 9%: $48,000 \times 1.09 = 52,320$.   - Long-term debt will decrease by $5,000: $83,000 - 5,000 = 78,000$.   - Retained earnings will increase by $3,500: $40,000 + 3,500 = 43,500$.   - Total projected liabilities and equity without common stock: $52,320 + 78,000 + 43,500 = 173,820$.3. Add the unchanged common stock: $173,820 + 36,000 = 209,820$.4. The difference between total projected assets and total projected liabilities and equity is the external financing need: $224,540 - 209,820 = 14,720$.Therefore, the correct projected external financing need is $14,720, which corresponds to option B.

A Firm Has the Following Account Balances for This Year