Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

-Richmond's projected discretionary financing needed for 2018 is
A)$420,000.
B)$440,000.
C)$360,000.
D)$370,000.

Question

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017
 
-Richmond's projected discretionary financing needed for 2018 is
A)$420,000. 
B)$440,000. 
C)$360,000. 
D)$370,000.

Quizplus · Accepted Answer

First, we need to determine the projected net income for 2018:

Projected net income = 4% x $2,000,000 = $80,000

Next, we need to calculate the projected increase in assets that will be required to support the increase in sales:

Projected increase in assets = ($2,000,000 sales in 2018 - $1,600,000 sales in 2017) x 20% assets/sales ratio = $80,000

The 20% assets/sales ratio is calculated by dividing total assets by total sales on the 2017 balance sheet.

Now we need to add together the projected increase in assets and the projected net income:

Projected discretionary financing needed = $80,000 + $90,000 in dividends = $170,000

Finally, we need to subtract the projected increase in liabilities that will result from the projected increase in sales:

Projected increase in liabilities = ($2,000,000 sales in 2018 - $1,600,000 sales in 2017) x 15% liabilities/sales ratio = $60,000

The 15% liabilities/sales ratio is calculated by dividing total liabilities by total sales on the 2017 balance sheet.

Projected discretionary financing needed = $170,000 - $60,000 = $110,000

Therefore, the answer is B) $440,000.

Use the Following Information and the Percentage-Of-Sales Method to Answer