Question

7.The Manning Company has financial statements as shown next, which are representative of the company’s historical average.

The firm is expecting a 25 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

Income Statement
Sales	$	300,000
Expenses		231,000
Earnings before interest and taxes	$	69,000
Interest		8,000
Earnings before taxes	$	61,000
Taxes		16,000
Earnings after taxes	$	45,000
Dividends	$	13,500

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	5,000	Accounts payable	$	29,900
Accounts receivable		81,000	Accrued wages		1,700
Inventory		79,000	Accrued taxes		4,400
Current assets	$	165,000	Current liabilities	$	36,000
Fixed assets		90,000	Notes payable		8,000
			Long-term debt		20,000
			Common stock		130,000
			Retained earnings		61,000
Total assets	$	255,000	Total liabilities and stockholders' equity	$	255,000

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)

	The firm

1

Answer 1

	Earnings after taxes	$          45,000
Divided by:	Sales	$        300,000
	Profit margin	15%
	Dividends	$          13,500
Divided by:	Earnings after taxes	$          45,000
	Payout ratio	30%
	Spontaneous Assets = Current assets
	Spontaneous Liabilities = Current liabilities
	Projected sales (300000+(300000*25%))	$        375,000
	Earnings after taxes (375000*15%)	$          56,250
Less:	Dividend Paid (56250*30%)	$          16,875
	Increase in retained earnings	$          39,375
	Increase in current assets (165000*25%)	$          41,250
Less:	Increase in current liabilities (36000*25%)	$            9,000
Less:	Increase in retained earnings	$          39,375
	External fund needed (Surplus)	$          (7,125)
	Fund Surplus	$            7,125
	The firm have surplus of funds	$            7,125