-Using ratios derived from the income statement and balance sheet above,what is Kooshy Company's "shorthand" estimate of external funds required (EFR) for a 20% increase in sales?

Question

-Using ratios derived from the income statement and balance sheet above,what is Kooshy Company's "shorthand" estimate of external funds required (EFR)for a 20% increase in sales?

Quizplus · Accepted Answer

To calculate the EFR, we need to use the following formula:
EFR = (A/S) x ∆S - Increase in spontaneous liabilities
Where:
A = Assets
S = Sales
∆S = Increase in Sales

First, let's find the ratio of assets to sales:
A/S = 0.70

Next, let's find the increase in sales:
20% x $350 = $70

Now, let's estimate the increase in spontaneous liabilities:
We can assume that spontaneous liabilities will increase at the same rate as sales, so the increase in spontaneous liabilities will be:
20% x $140 = $28

Now, we can calculate the EFR:
EFR = (0.70 x $70) - $28 = $29

Therefore, the "shorthand" estimate of external funds required for a 20% increase in sales is $29. Choice C is correct.

-Using Ratios Derived from the Income Statement and Balance Sheet