A firm has the following account balances for this year. Sales for the year are $600,000. Projected sales for next year are $642,000. 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?
A) $10,520
B) $13,120
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 $600,000. Projected sales for next year are $642,000. 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? 
A) $10,520 
B) $13,120 
C) $18,520 
D) $20,720 
E) $25,620

Quizplus · Accepted Answer

Projected total assets = 1.1 x $600,000 = $660,000
Projected total liabilities and equity = $618,500 ($600,000 x (1 – 5%) + $5,000 – $3,500)

Projected external financing needed = Projected total assets – Projected total liabilities and equity
= $660,000 – $618,500
= $41,500

Therefore, the projected external financing needed is $13,120 (B).

A Firm Has the Following Account Balances for This Year