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 $2 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 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carlsbad will need 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.

Answer 1

Answer:

$246,000

Explanation:

Calculation to determine the additional funds Carlsbad will need for the coming year

First step is to calculate the 2020 retained earnings using this formula

2020 retained earnings= net income margin* sales* retention ratio

Let plug in the formula

2020 retained earnings= 3%*6000000*30%

2020 retained earnings= $54,000

Now let calculate the AFN using this formula

AFN = Increase in assets-Increase in spontaneous liabilities -Retained earnings

Let plug in the formula

Increase in assets =$2,000,000*20% =$400,000

Increase in spontaneous liabilities= (250000+250000)*20%=100000

AFN= 400000-100000-$54000

AFN =$246,000

Therefore the additional funds Carlsbad will need for the coming year is $246,000