ST3. Use the percentage of sales forecasting method to compute the additional fi
ID: 2653384 • Letter: S
Question
ST3. Use the percentage of sales forecasting method to compute the additional financ- ing needed by Lambrechts Specialty Shops, Inc. (LSS), if sales are expected to increase from a current level of $20 million to a new level of $25 million over the coming year. LSS expects earnings after taxes to equal $1 million over the next year (2014). LSS intends to pay a $300,000 dividend next year. The current year balance sheet for LSS is as follows:
Lambrechts Specialty Shops, Inc. Balance Sheet as of December 31, 2013
All assets, except “cash,” are expected to vary proportionately with sales. Of total liabilities and equity, only “accounts payable” is expected to vary proportionately with sales.
cash 1,000,000 Accounts Payable 3,000,000 accounts receivable 1,500,000 Notes payable 3,000,000 inventories 6,000,000 Long term debt 2,000,000 net fixed assets 3,000,000 Stockholders' equity 3,500,000 Total assets 11,500,000 Total liabilities and equity 11,500,000Explanation / Answer
Increase in Sales (percentage) = (25-20)/20 = 25%
Increase in Total Asset = (11500000-1000000)*25% = $ 2,625,000
Increase in Accounts Payable = 3000000*25% = 750000
Total Fund needed = Increase in Total Asset - Increase in Accounts Payable
Total Fund needed = 2625000-750000
Total Fund needed = 1875000
Internal Fund available = Addition to retained earning
Addition to retained earning = earnings after taxes - dividend
Addition to retained earning = 1000000-300000
Addition to retained earning = $ 700000
Additional financing needed = Total Fund needed - Addition to retained earning
Additional financing needed = 1875000 - 700000
Additional financing needed = $ 1,175,000
Answer
Additional financing needed = $ 1,175,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.