Question

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

Income Statement
Sales	$7235
Costs	$4280

Balance Sheet
Assets	$16063	Debt	$8972
		Equity	?

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7709.

What is the external financing needed? (Negative amount should be indicated by a minus sign.)

(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)

Answer 1

Solution:

First - Let us calculate an amount of Equity in the given balance sheet:

Assets side shows: Total 16063.00

Liabilities side shows: Debt 8972.00 + Equity ? --> Total has to be 16063.00 to balance the balance sheet.

Therefore, Equity would be 16063-8972 --> 7091.00

Now,

As per given data there is an increase in projected sales i.e. 7709.00

Therefore let’s calculate sales increase %

• Projected sale 7709.00 – Current sales 7235.00--> 474.00

• 474.00/7235.00=6.55%

As per another given information we note that Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Hence the revised income statement and balance sheet will look like as below:

Income Statement

Particulars	Amount
Sales	7709.00
Cost	(4560.34)
Net Income	3148.66

Balance Sheet

Liabilities	Amount	Assets	Amount
Equity	10240.00	Assets	17115.00
Debt	8972.00
Total	19212.00	Total	17115.00

It given that no dividends are paid and therefore,

Equity account will increase by net income as below:

• 7091.00 + 3148.66 = 10239.66 or 10240.00

Hence,

External financing needed would be

Total assets – Total liabilities and equity

17115.00 - 8972.00 - 10240.00 = (2097.00)