United Products Inc. has the following balance sheet: Current assets $5,000 Acco
ID: 2613737 • Letter: U
Question
United Products Inc. has the following balance sheet:
Current assets
$5,000
Accounts payable
$1,000
Notes payable
1,000
Net fixed assets
5,000
Long-term debt
4,000
Common equity
4,000
Total assets
$10,000
Total liabilities and equity
$10,000
Business has been slow; therefore, fixed assets are vastly underutilized. Management believes it can double sales next year with the introduction of a new product. No new fixed assets will be required, and management expects that there will be no earnings retained next year. What is next year’s additional funding requirement?
Current assets
$5,000
Accounts payable
$1,000
Notes payable
1,000
Net fixed assets
5,000
Long-term debt
4,000
Common equity
4,000
Total assets
$10,000
Total liabilities and equity
$10,000
Explanation / Answer
To determine the additional funding requirement, we will prepare the next year's balance sheet with the revised figures.
Revised Balance Sheet:
Since, there will be no retained earnings, the balance in the common equity account would continue to remain at $4,000. Therefore, the additional funding requirement would be $4,000 ($15,000 - $11,000) for the next year.
Answer is $4,000.
Notes:
1) We consider increase/decrease in only spontaneous sources of financing. Notes payable is a current liability but it is not a spontaneous source of financing, hence, there is no impact of increase in sales on its amount.
Current assets 10,000 Accounts payable 2,000 Notes payable 1,000 Net fixed assets 5,000 Long-term debt 4,000 Common equity 4,000 Total assets $15,000 Total liabilities and equity $11,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.