Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in...

Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in 2020, or by 20%. Its assets totaled $2 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, 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 is forecasted to be 3%, and the forecasted retention ratio is 25%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.

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Homework Answers

Answer #2

2019:

Sales = $5,000,000
Total Assets = $2,000,000
Profit Margin = 3.00%
Retention Ratio = 0.25

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $250,000 + $250,000
Spontaneous Current Liabilities = $500,000

2020:

Sales = $6,000,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $6,000,000 * 3.00% * 0.25
Addition to Retained Earnings = $45,000

Increase in Total Assets = $2,000,000 * 0.20
Increase in Total Assets = $400,000

Increase in Spontaneous Current Liabilities = $500,000 * 0.20
Increase in Spontaneous Current Liabilities = $100,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $400,000 - $100,000 - $45,000
Additional Fund Needed = $255,000

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