Financial ManagementTU Board 2023
The balance sheet of Sunrise Battery Company (SBC) of the year 2023 is given below: Balance Sheet of Sunrise Battery Company (SBC) as on December 31, 2023 AssetsAmount (Rs)Liabilities and…
10The balance sheet of Sunrise Battery Company (SBC) of the year 2023 is given below:
Balance Sheet of Sunrise Battery Company (SBC) as on December 31, 2023 AssetsAmount (Rs)Liabilities and EquityAmount (Rs)Cash50,000Accounts payable60,000Accounts receivables70,000Accruals20,000Inventory80,000Notes payable50,000Total current assets200,000Total current liabilities130,000Net fixed assets400,000Common stock250,000Retained earnings220,000Total Assets600,000Total600,000 The sales are expected to increase from Rs 1,000,000 in 2023 to Rs 1,200,000 in 2024. The profit margin of the company is 10 percent and dividend payout ratio is 60 percent. All the assets of SBC are expected to increase in the proportion to the sales. a. Use additional fund needed (AFN) equation and estimate the AFN of SBC for the year 2024. b. Prepare projected balance sheet of the SBC for the year 2024 using percentage on sales forecasting method to estimate additional financing needed (AFN).
Answer
Solution to Question (a): Estimating Additional Funds Needed (AFN) for 2024
Step 1: Calculate Projected Net Income for 2024
Given:
- Sales (2023) = Rs 1,000,000
- Sales (2024) = Rs 1,200,000
- Profit margin = 10%
Step 2: Calculate Retained Earnings for 2024
Given:
- Dividend payout ratio = 60%
- Retained earnings = Net Income × (1 – Dividend Payout Ratio)
Step 3: Determine the Increase in Assets (ΔA)
Since all assets increase proportionally with sales:
\text{Percentage Increase in Sales} = \frac{1,200,000 - 1,000,000}{1,000,000} = 0.20 \text{ (or 20%)}
Step 4: Determine the Increase in Spontaneous Liabilities (ΔL)
Spontaneous liabilities (accounts payable and accruals) increase proportionally with sales.
\text{Percentage of Sales (2023)} = \frac{80,000}{1,000,000} = 0.08 \text{ (or 8%)}
Step 5: Apply the AFN Equation
The AFN equation is:
Substituting the values:
Final Answer for (a): The Additional Funds Needed (AFN) for 2024 is Rs 56,000.
Solution to Question (b): Projected Balance Sheet for 2024 Using Percentage of Sales Method
Step 1: Calculate Percentage of Sales for Each Item (2023)
| Item | Amount (Rs) | Percentage of Sales |
|---|---|---|
| Sales | 1,000,000 | 100% |
| Cash | 50,000 | 5% |
| Accounts Receivable | 70,000 | 7% |
| Inventory | 80,000 | 8% |
| Total Current Assets | 200,000 | 20% |
| Net Fixed Assets | 400,000 | 40% |
| Total Assets | 600,000 | 60% |
| Accounts Payable | 60,000 | 6% |
| Accruals | 20,000 | 2% |
| Total Current Liabilities | 80,000 | 8% |
| Notes Payable | 50,000 | 5% |
| Common Stock | 250,000 | 25% |
| Retained Earnings | 220,000 | 22% |
| Total Liabilities & Equity | 600,000 | 60% |
Step 2: Project 2024 Values Using Percentage of Sales
Since sales increase to Rs 1,200,000, we apply the same percentages:
| Item | Calculation (2024) | Amount (Rs) |
|---|---|---|
| Sales | 1,200,000 × 100% | 1,200,000 |
| Cash | 1,200,000 × 5% | 60,000 |
| Accounts Receivable | 1,200,000 × 7% | 84,000 |
| Inventory | 1,200,000 × 8% | 96,000 |
| Total Current Assets | 60,000 + 84,000 + 96,000 | 240,000 |
| Net Fixed Assets | 1,200,000 × 40% | 480,000 |
| Total Assets | 240,000 + 480,000 | 720,000 |
| Accounts Payable | 1,200,000 × 6% | 72,000 |
| Accruals | 1,200,000 × 2% | 24,000 |
| Total Current Liabilities | 72,000 + 24,000 | 96,000 |
| Notes Payable | 1,200,000 × 5% | 60,000 |
| Common Stock | 250,000 (unchanged) | 250,000 |
| Retained Earnings | 220,000 + 48,000 | 268,000 |
| Total Liabilities & Equity | 96,000 + 60,000 + 250,000 + 268,000 | 674,000 |
Step 3: Calculate Additional Financing Needed (AFN)
From the projected balance sheet:
- Total Assets (2024) = Rs 720,000
- Total Liabilities & Equity (2024) = Rs 674,000
- Deficit = 720,000 – 674,000 = Rs 46,000
However, we already calculated AFN = Rs 56,000 in part (a). The discrepancy arises because:
- Notes payable (Rs 50,000 in 2023) is assumed to increase proportionally (Rs 60,000 in 2024).
- If we assume notes payable remains constant (Rs 50,000), the AFN increases to Rs 56,000.
Thus, the correct projected balance sheet must account for additional financing of Rs 56,000 (either as new debt or equity).
Final Projected Balance Sheet (2024)
**Balance Sheet of Sunrise Battery Company (SBC) as on December 31, 2024**
```figure
{"type":"timeline","events":[{"date":"2023","label":"Total Assets: Rs 600,000\nSales: Rs 1,000,000"},{"date":"2024","label":"Total Assets: Rs 720,000\nSales: Rs 1,200,000\nAFN: Rs 56,000"}],"caption":"Growth in Assets and Sales from 2023 to 2024 with AFN Requirement"}
| Assets | Amount (Rs) | Liabilities & Equity | Amount (Rs) |
|---|---|---|---|
| Current Assets | Current Liabilities | ||
| Cash | 60,000 | Accounts Payable | 72,000 |
| Accounts Receivable | 84,000 | Accruals | 24,000 |
| Inventory | 96,000 | Total Current Liabilities | 96,000 |
| Total Current Assets | 240,000 | Long-term Debt | |
| Net Fixed Assets | 480,000 | Notes Payable | 50,000 |
| Total Assets | 720,000 | Equity | |
| Common Stock | 250,000 | ||
| Retained Earnings | 268,000 | ||
| Additional Financing Needed | 56,000 | ||
| Total Liabilities & Equity | 674,000 + 56,000 = 730,000 |
Note: The additional Rs 56,000 can be raised through new debt, equity, or retained earnings (if the dividend payout ratio changes).
Verification of AFN Calculation
Using the AFN formula again:
This confirms the additional financing requirement of Rs 56,000.
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