Question

You are the most creative analyst for Green Rabbit Transportation Inc., and your admirers want to see you work your analytical magic once more.

	2016 Actual Results	2017 Initial Forecast
Net sales	$18,000	$27,000
Cost of goods sold	(14,400)	(21,600)
Gross profit	$3,600	$5,400
Fixed operating costs except depreciation	(900)	(1,350)
Depreciation	(360)	(540)
Earnings before interest and taxes	$2,340	$3,510
Interest	(360)	(360)
Earnings before taxes	$1,980	$3,150
Taxes	(792)	(1,260)
Net income	$1,188	1,890
Common dividends	(641.52)	(641.52)
Addition to retained earnings	$546.48	$1,248.48
Earnings per share	$59.4	$94.5
Dividends per share	$32.076	$32.076
Number of common shares (millions)	20.0	20.0

Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

1. Spontaneously generated funds will sufficiently cover any financing needs.

2. Green Rabbit Transportation Inc. will be issuing additional debt in the coming year.

3. Green Rabbit Transportation Inc. will be issuing additional shares of common stock in the coming year.

4. The cost of sales percentage for Green Rabbit Transportation Inc. will decrease due to economies of scale.

5. The forecasted increase in net sales is 50%.

6. No excess capacity currently exists.

Which of the following could be a direct cause of financing feedback?

I. Issuing additional common stock

II. Purchasing additional buildings with internally generated funds

III. An unexpected increase in sales

IV. Borrowing from the bank

II and IV

I and IV

III

IV

III and IV

II

I

I and II

What is one of the potential consequences of financing feedback that might cause the actual financing needs to be higher than initially thought? Financing feedback might:

1. Increase charges against net income, reducing the amount of available internally generated funds

2. Reduce the level of cash on hand

3. Spontaneously increase liabilities associated with the cost of goods sold

4. Increase the length of the operating cycle

Answer 1

Answer : Correct options are 1. Spontaneously generated funds will sufficiently cover any financing needs and The forecasted increase in net sales is 50%.

Reason :

1.) Spontaneously generated funds will sufficiently cover any financing needs .Currently interest expense is the finacing need meet by it.

2.) and 3rd are false as Thre is no additional issue of debt because interest expense is same in both cases and alos there is no increase in number of shares outstanding.

4.) Cost of Sales percentage is same in both year.

5.) Increase in Sales 27000 (18000 + 50%) is correct Statement.

6.) There is excess capacity available thats way sales is increasing.

Answer : 2) Correct option is I and IV.

The Issuing additional common stock and IV. Borrowing from the bank are the direct cause of finacial feedback as they are finacing type of activities.

Answer : 30 Correct Option is 1. Increase charges against net income, reducing the amount of available internally generated funds.

Reason :

Financing feedback might Increase charges against net income, reducing the amount of available internally generated funds