Consider the following simplified financial statements for the Fire Corporation
ID: 2821630 • Letter: C
Question
Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes):
Income Statement
Sales
$32922
Costs
$25264
Balance Sheet
Assets
$50034
Debt
$15500
Equity
?
The company has predicted a sales increase of 7 percent. Assume Fire pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not.
Determine the external financing needed. (Negative amount should be indicated by a minus sign.)
(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)
Income Statement
Sales
$32922
Costs
$25264
Explanation / Answer
Before increase in the sales
Net Income Before Increase in sales = Sales – Cost of goods sold
= $32,922 – 25,264
= $7,658
Total Assets = $50,034
Debt = $15,500
Equity = Total Assets – Debt = $50,034 – 15,500 = $ 34,534
After Increase in 7% Sales
Net Income will also increase to the extent of 7% in case of 7% increase in sales
= $7,658 x 107%
= $ 8,194.06
Payment of cash dividend = $8,194.06 x 0.50 = $4,097.03
The Addition to Retained Earnings = $8,194.06 – 4,097.03 = $4,097.03
Total Asset = $50,034 x 107% = $ 53,536.38
Total Debt & Equity = $15,500 + ($34,534 + 4,097.03) = $54,131.03
Therefore, the External Financing Needed = Total Assets – Total Debt & Equity
= $ 53,536.38 - 54,131.03
= -$594.65 (Negative)
“Hence, the External Financing Needed = -$594.65 (Negative)“