Carlsbad Corporation\'s sales are expected to increase from $5 million in 2016 t
ID: 1170179 • Letter: C
Question
Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, 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 4%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast Carlsbad's additional funds needed 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 cent.
Explanation / Answer
Actual funds needed=(increase in assets)-(increase in liabilites)-((M*Next year sales)*(1-payout))
increase in assets=20%*5*10^6=1000000
Liabiltes here we need to consider account payable and accrued only
increase in liabilites=20%*(250000+250000)=100000
M=profit margin=4%
next year sales=6*10^6
1-payout=retention=30%
=72000
AFN=1000000-100000-72000=828000