Question

Here are the abbreviated financial statements for Planner’s Peanuts:

INCOME STATEMENT, 2019
Sales	$	3,500
Cost		2,700
Net income	$	800

BALANCE SHEET, YEAR-END
		2018				2019						2018				2019
Assets		$	4,500			$	4,800			Debt		$	833			$	1,000
										Equity			3,667				3,800
Total		$	4,500			$	4,800			Total		$	4,500			$	4,800

a. If sales increase by 20% in 2020 and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20%), what must be the balancing item?

b. What will be the value of this balancing item?

Answer 1

The balancing item is dividend figure having a value of 200 i.e., if net income next year is 960 and equity increases by 760(4560-3800) the dividend for 2020 is 200 (960-760) which is the difference between increase in net income and proportionate increase in equity.     Construction of income statement for 2020 a)Sales=3500 ×1.20=4200 b)cost=2700×1.20=3240 c)net income (a-b)=960 i.e., net income is also increased by 20%(960-800/800)*100. As stated in the question percentage of sales planning model is to be followed for the year 2020,accordingly Assets in 2020 will be =assets of 2019×1.20 =4800×1.20=5760 debt in 2020 will be debt of 2019×1.20=1000×1.20=1200 and equity is 3800×1.20=4560.    A company's positive net income causes increase in retained earnings which is a part and parcel of stock holders equity because the stockholders equity always increases by net income minus any dividend paid proof i)equity of 2019 is =3800 ii)add net income of 2020 =960 iii)less dividend paid= 200 iv)equity of 2020=4560