Question

The Manning Company has financial statements as shown next, which are representative of the company’s historical average. The firm is expecting a 40 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.

Income Statement
Sales   $   300,000
Expenses      246,800
Earnings before interest and taxes   $   53,200
Interest      9,100
Earnings before taxes   $   44,100
Taxes      17,100
Earnings after taxes   $   27,000
Dividends   $   5,400

Balance Sheet
Assets   Liabilities and Stockholders' Equity
Cash   $   9,000   Accounts payable   $   29,000
Accounts receivable      56,000   Accrued wages      2,250
Inventory      70,000   Accrued taxes      4,750
Current assets   $   135,000   Current liabilities   $   36,000
Fixed assets      86,000   Notes payable      9,100
          Long-term debt      25,500
          Common stock      125,000
          Retained earnings      25,400
Total assets   $   221,000   Total liabilities and stockholders' equity   $   221,000
  
Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)
  

Answer 1

Calculation is given in the below attached image

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