Question:
The Manning Company has the following financial statements, which are representative of the company's historical average.
Income Statement
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Sales..........................................................................
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$200,000
|
|
Expenses...................................................................
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158,000
|
|
Earnings before interest and taxes............................
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$ 42,000
|
|
Interest......................................................................
|
7,000
|
|
Earnings before taxes................................................
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$ 35,000
|
|
Taxes.........................................................................
|
15,000
|
|
Earnings after taxes..................................................
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20,000
|
|
Dividends.................................................................
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$ 6,000
|
Balance Sheet
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Assets
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Liabilities and Stockholders' Equity
|
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Cash............................. $ 5,000
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Accounts payable.............. $ 25,000
|
|
Accounts receivable......... 40,000
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Accrued wages.................. 1,000
|
|
Inventory..................... 75,000
|
Accrued taxes................... 2,000
|
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Current assets............. $120,000
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Current liabilities............. $ 28,000
|
|
Fixed assets.................. 80,000
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Notes payable.................... 7,000
|
|
|
Long-term debt................. 15,000
|
|
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Common stock.................. 120,000
|
|
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Retained earnings.............. 30,000
|
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Total assets................... $200,000
|
Total liabilities and
stockholders' equity........ $200,000
|
The firm is expecting a 20 percent increase in sales next year, and management is concerned about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.
Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.)