Question

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?

Answer 1

Answer:

The external financing requirement is $ 1.2 million.

Explanation:

The accounting equation is asset = liability +equity. In simple words any increase in one side of balance sheet (i.e asset) will result in increase in other side of balance sheet (i.e equity + liability) and vice versa.

So if assets are projected to increase by $ 2.7 million than equity and liability is also required to increase by same. As equity is increased by $ 1.5 million, the liability/external financing is calculated as follow

Asset = Liability + Equity

Liability = $ 2,700,000- $ 1,500,000

Liability = $ 1.2 million