Question

The most recent financial statements for Zoso, Inc., are shown here (assuming no income taxes):

Income Statement		Balance Sheet
Sales	$4,500	Assets	$15,300	Debt	$10,400
Costs	3,440			Equity	4,900
Net income	$1,060	Total	$15,300	Total	$15,300

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $5,959.

Required:

What is the external financing needed? (Do not round your intermediate calculations.)

Answer 1

Solution:

• as given assets and costs are in proportion to sales.

Therefore,

Asset/sales =15,300/4,500 = 3.4

This implies that asset is 3.4 times of sales.

So when sales increases to 5,959 asset becomes 3.4 times of 5959, which is equal to ( 5,959*3.4) 20,260.60 .

• cost/sales = 3440/4500

= 0.7644

This implies that cost is 0.7644 times of sales. Therefore when sales increases to 5,959 cost becomes 4,555.0596 (5,959*0.7644) .

• AFTER INCREASE IN SALES

Income Statement

Sales. $ 5,959

Costs. $4,555.0596

Net income. $1,403.9404

(Sales -costs)

As there is no dividend to be paid, all the net profit is transferred to equity as retained earnings.

Balance Sheet

Asset. $ 20,260.60. Debt. $10,400

Equity. $ 6,303.9404

Total. $ 20,260.60. Total. $ 16,703.9404

•As we know assets should be equal to equity and liability, in this question they are not . So this difference between them is the amount of external financing required.

Calculation for external financing

Assets= equity+ liability

20,260.60= 6,303.9404 + 10,400

20,260.60= 16,703.9404

Therefore

External financing needed = 20,260.60- 16,703.9404

= 3,556.66