Question

The most recent financial statements for Dockett, Inc., are shown here (assuming no income taxes): Income Statement Sales $7468 Costs $4028 Balance Sheet Assets $17637 Debt $6122 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 $8681. What is the external financing needed?

Answer 1

Answer

Equity = Total Assets – Debt

= 17637 - 6122

Equity = $11,515

It is mentioned in the question that Assets and Cost are proportional to sales, that means Increase in Sales leads to increase in Assets and Cost and by the same rate and Vice-Versa.

Change in sales = Projected Sales – Existing sales

= 8681 – 7468

Change (Increase) in sales = $1213

% Increase in sales = (Change in sales / Existing Sales) * 100

= (1213 / 7468) * 100

% Increase in sales = 16.24%

There is a Increase of 16.24% in sales, that means the Cost and Assets will also increase by 16.24%.

Proposed Income Statement
Sales	8,681.00
Cost (4,028 + 16.24%)	4,682.15
Income	3,998.85

It is mentioned in the question that no Dividend is paid, that means the whole Net Income is in the Company i.e. In Equity

Closing Equity = Opening Equity + Net Income

= 11,515 + 3,998.85

Closing Equity = $15,513.85

Proposed Balance Sheet
Assets (17,637 + 16.24%)	20,501.25	Debt	6,122.00
		Equity	15,513.85
Total	20,501.25	Total	21,635.85

As we can see from Above that Balance Sheet total does not match, It shows that Total of Liability and Equity is more than Total Assets, that means there is Negative External Financing.

External Financing = Total Assets – Total Liabilities & Equity

= 20,501.25 - 21,635.85

External Financing = ($1,134.6)