Financial Forecasting (Percent of Sales Method) The Millennium Company has the following statements which are representative of the company's historical average. Income Statement Sales P2,000,000 Cost of Sales 1,200,000 Gross Profit 800,000 Operating Expenses 380,000 Earnings before interest and taxes 420,000 Interest expense 70,000 Earnings before taxes 350,000 Taxes (35%) 122.500 Earnings after taxes P 227,500 Dividends P136,500 Statement of Financial Position Assets 400,000 Cash P 50,000 Accounts Receivable Inventory 750,000 Current Assets P 1,200,000 Fixed Assets(net) Total Assets Accounts payable 800,000 P200,000,000 Liabilities and Equity P 250,000 Accrued wages Accrued taxes Current Liabilities 10,000 20,000 P 280,000 Notes payable - bank 70,000 Long-term debt 150,000 Ordinary shares 1,200,000 Retained earnings 300,000 Total liabilities and equity P 2,000,000 1. 2. 3. 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. Solution: Step 1: Forecast the Income Statement The projected income statement will show the following: Sales Cost of sales P 2,400,000 1,440,000 Gross profit Operating expenses 960,000 456,000 Earnings before interest and taxes 504,000 Interest expenses 70,000 Earnings before taxes 434,000 Taxes (35%) 151,900 Earnings after taxes P 282,100 Dividends (36% payment) P 101,600 (1) Step 2: Forecast the Statement of Financial Position The projected statement of financial position will show the following: Cash Account Receivable Assets P 60,000 (2) 480,000 Inventory (3) 900,000 Total current assets Fixed assets (net) (4) P 1,440,000 800,000 Total assets P 2,240,000 Accounts payable (5) Liabilities and Equity P 300,000 Accrued wages (6) 12,000 Accrued taxes (7) 24,000 Current liabilities Notes payable bank (4) P 336,000 70,000 Long-term debt Ordinary shares (4) 150,000 (4) Retained earnings (8) Total Additional financing required 1,200,000 480,500 P 2,236,500 3,500 Total P2,240,000 Problem 2 (Calculating EFN) The most recent financial statements for Donald Inc., are shown assuming no income taxes. Income Statement Statement of Financial Position Sales Costs P 6,300 3,890 Asset's P18,300 ..Debt P12,400 Equity 5,900 Net income P. 2,410 Total P18,300 Total P18,300 Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be P7,434. What is the external financing needed?