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Learning Objectives

Learning Objectives. Determine the need for new funding resulting from sales growth. (LO 4 ) Calculate the required new funds (RNF) and sustainable growth rate (SGR). (LO 5 ) Assess and apply the effects of IFRS on forecasting financial statements. (LO 6 ). Percent-of-Sales Method.

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Learning Objectives

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  1. Learning Objectives Determine the need for new funding resulting from sales growth. (LO4) Calculate the required new funds (RNF) and sustainable growth rate (SGR). (LO5) Assess and apply the effects of IFRS on forecasting financial statements. (LO6)

  2. Percent-of-Sales Method Required New Funds (RNF) = Spontaneous asset increase (+60%) $60,000 Minus: spontaneous liability increase (25%) -25,000 Minus: increase in retained earnings [(1-50%)x6%] -9,000 $26,000 LO4 and LO5

  3. Sustainable Growth Rate (SGR) The maximum rate of growth achievable without increasing the debt ratio LO4 and LO5

  4. LO4 and LO5 Table 4-19RNF with sales expansion (percent-of-sales method HOWARD CORPORATION Sales $200,000 Sales increase 50.00% $100,000 Assets Before Increase RNF After Cash $ 5,000 $ 2,500 $ 7,500 Accounts receivable 40,000 20,000 60,000 Inventory 25,00012,500 37,500 Total current assets $ 70,000 35,000 105,000 Equipment 50,00025,00075,000 Total assets $120,000 $ 60,000 $180,000 Liabilities and Shareholders’ Equity Accounts payable $ 40,000 $20,000 $ 60,000 Accrued expenses 10,000 5,000 15,000 Notes payable 15,000 026,00041,000 Total current liabilities $ 65,000 25,000 $116,000 Common stock 10,000 10,000 Retained earnings 45,0009,00054,000 Total liabilities and sh. equity $120,000 $34,000 $180,000 Required new funds $26,000 26,000 Selected ratios Debt/Total assets 65/120 = 0.54 116/180 = .064 Debt/Equity 65/(10+45) = 1.18 116/(10+54) = 1.81 Current ratio 70/65 = 1.08 105/116 = 0.91

  5. LO4 and LO5 Table 4-20RNF, based on sustainable growth rate (SGR) HOWARD CORPORATION Sales $200,000 Sales increase 12.24% $ 24,480 Assets Before Increase RNF After Cash $ 5,000 $ 612 $ 5,612 Accounts receivable 40,000 4,896 44,896 Inventory 25,000 3,060 28,060 Total current assets $ 70,000 8,568 78,568 Equipment 50,000 6,12056,120 Total assets $120,000 $ 14,688 $134,688 Liabilities and Shareholders’ Equity Accounts payable $ 40,000 $ 4,896 $ 44,896 Accrued expenses 10,000 1,224 11,224 Notes payable 15,000 01,83416,834 Total current liabilities $ 65,000 6,120 $ 72,954 Common stock 10,000 10,000 Retained earnings 45,0006,73451,734 Total liabilities and sh. equity $120,000 $12,854 $134,688 Required new funds $1,834 1,834 Selected ratios Debt/Total assets 65/120 = 0.54 73/135 = 0.54 Debt/Equity 65/(10+45) = 1.18 73/(10+52) = 1.18 Current ratio 70/65 = 1.08 79/73 = 1.08

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