17-1: AFN Equation – Carter Corporation’s sales are expected to increase from $5

Question

17-1: AFN Equation – Carter Corporation’s sales are expected to increase from $5 million in 2015 to $6 million in 2016, or by 20%. Its assets totaled $3 million at the end of 2015. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2015, current liabilities are $1 million, consisting of $250, 000 of accounts payable, $500,000 of notes payable, and $250, 000 of accrued liabilities. Its profit margin in forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

Explanation / Answer

Spontaneous increase in liabilities = 2015 liabilities x Sales growth rate

= $1,000,000 x 20%

= $200,000

Increase in retained earnings = 2016 sales x profit margin x retention rate

= 6,000,000 x 5% x 30%

= $90,000

Increase in assets = 2015 assets x Sales growth rate

= 3,000,000 x 20%

= $600,000

Additional funds needed = Increase in assets - Increase in liabilities - Increase in retained earnings

= 600,000 - 200,000 - 90,000

= $310,000

Hence, Cater Corporation will need $310,000 to finance the increased level of sales.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.