Question

When computing external financing needed, A. you’ll need to construct a current year income statement in...

When computing external financing needed,

A. you’ll need to construct a current year income statement in order to determine the retention ratio.

B. Generally assets will increase proportionate to sales.

C. Total assets must be equal to total liabilities plus total owners equity.

D. Both A and C.

e. All of the above.

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Answer #1

Answer : e. All of the above

Explanation :

EFN =

(A/S) x (Δ Sales) - (L/S) x (Δ Sales) - [PM x FS x (1-d)]

Where,

A/S = Asset to sales

∆ Sales = Change in sales

L/S = Liablity to sales

PM: Profit Margin on Sales

FS: Forecasted Sales

d: dividend payout percent

(1 - d): Percent of earnings retained after paying out dividends

As you can see from above formula it is clear that retention ratio is needed and that is calculated by using incime statement. And Asset & liablity are proportional to sales. And also Total asset should be equal to total liablity plus owner equity to find EFN.

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