Question

2016 Actual Results 2017 initial forecast

earnings per share	$50	$67
gross profit	$3,000	$3,900
cost of goods sold	(12,000)	(15,600)
interest	(300)	(300)
common dividends	(535)	(535)
fixed operating costs except depreciation	(750)	(975)
addition to retained earnings	$455	$806
net sales	$15,000	$19,500
dividends per share	$27	$27
depreciation	(300)	(390)
net income	$990	1,341
earnings before tax	$1,650	$2,235
earnings before interest and taxes	$1,950	$2,535
number of common shares (millions)	20.0	20.0
taxes	(660)	(894)

Question:
You are the most creative analyst for your company Inc., and your admirers want to see you work your analytical magic once more.
Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

a. additional external financing will be required by your company.
b. the forecasted increase in net sales is 30%
c. the facility is currently operating at full capacity
d. the facility is no currently operating at full capacity.
e. the assigned depreciation method has changed.
f. no additional external financing will be required.

Part two
If the company above had neitiher a sufficient amount of excess capacity to handle the forecasted increases in operations nor the level of retained earnings required to increase asset levels up to the necessary level for production, this difference would be referred to as _____________________________________ and could be acquired in which of the following forms?
a. alternative fiduciary necessities
b. additional funds needed
c. added fair needs
d. additional financing needed

Answer 1

Answer Part 1:

Correct answers are:

b. the forecasted increase in net sales is 30%

c. the facility is currently operating at full capacity

f. no additional external financing will be required.

Explanation:

Sales has increased from $15,000 to $19,450 and in terms of % increase it is 30% increase [($19,450 -$15,000) /$15,000]

We observe that depreciation is forecasted to increase from $300 to $390 which is 30% increase, implying additional fixed assets requirements with the same % increase as sales. This implies the facility is currently operating at full capacity and any increase in sales can only be achieved by similar increase in assets.

We observe that there is no increase in forecasted interest amount (as compared to actual interest of $300) which implies no external financing is required.

Hence above 3 are assumptions are made.

The statements that:

a. additional external financing will be required by your company.

d. the facility is not currently operating at full capacity.

e. the assigned depreciation method has changed.

cannot be assumptions made as can be interpreted from the data, as explained above.

Answer Part 2:

If the company above had neither a sufficient amount of excess capacity to handle the forecasted increases in operations nor the level of retained earnings required to increase asset levels up to the necessary level for production, this difference would be referred to as External Financing Needed and could be acquired in form of

d. additional financing needed

Explanation:

Identifying the funds which must be raised to support forecasted sales/operations level is one of outputs of forecasting process. This amount is termed as External Financing Needed (EFN) or Additional Funds Needed (AFN).

Other options are incorrect.