The Manning Company Has Financial Statements As Shown Next

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The Manning Company has financial statements as shown in the problem description, including income statement and balance sheet data. The company expects a 35 percent increase in sales next year, with no expansion of fixed assets, but through more efficient asset utilization. Only current liabilities are expected to vary directly with sales. Using the percent-of-sales method, determine whether the company has external financing needs or a surplus of funds by calculating the projected financial statements and financing gap.

Paper For Above instruction

The analysis of Manning Company's financial requirements based on projected sales growth necessitates a thorough calculation of its anticipated financial statements, profit margin, payout ratio, and external funding needs. This process involves employing the percent-of-sales method to estimate future assets, liabilities, and equity, as well as assessing the company's capacity for self-financing.

The initial step involves calculating key financial ratios from the current statements. The profit margin (net income to sales ratio) is derived from the income statement: net income of $24,200 divided by sales of $220,000, yielding approximately 11%. The payout ratio, which is dividends paid ($7,260) over net income ($24,200), is approximately 30%. Using these ratios, future financial statements can be projected based on the expected 35% sales increase.

Projected sales for next year: $220,000 1.35 = $297,000. Based on current ratios, we estimate the future net income: $297,000 11% ≈ $32,667. Dividends are expected to be 30% of net income: $32,667 * 30% ≈ $9,800. The retained earnings increase by the amount of net income minus dividends: $32,667 - $9,800 ≈ $22,867.

Assets are projected to increase in proportion to sales; current assets—cash, receivables, and inventory—are scaled by 35%. The current assets of $110,000 become approximately $148,500 (i.e., $110,000 * 1.35). Fixed assets remain unchanged at $93,000 since no fixed asset expansion is planned.

Liabilities fluctuate proportionally to sales, with current liabilities (accounts payable, accrued wages, taxes) projected to increase by 35%. Total current liabilities of $28,600 become approximately $38,710. Long-term debt remains unchanged at $21,500. Equity increases by the retained earnings accumulated during the year, totaling $27,600 + $22,867 = $50,467.

Summing these projections yields total assets of approximately $203,000 * 1.35 = $274,050, aligning with the proportional increase. Comparing projected assets and liabilities with sources of financing reveals whether Manning needs external funds. If projected assets exceed the sum of projected liabilities and equity, the company has a financing gap, i.e., external funding need; otherwise, a surplus.

Calculations show the projected total liabilities of approximately $62,410 ($38,710 current + $23,700 other liabilities), with stockholders' equity rising to about $147,640. The total projected liabilities and equity match the projected assets, indicating no external financing need. This conclusion is corroborated by the fact that the company can finance its growth internally through retained earnings.

In conclusion, by applying the percent-of-sales approach, Manning Company does not require external funds to support a 35% increase in sales. Instead, it can rely on internally generated funds, highlighting the importance of efficient asset utilization and profit retention in financing growth.

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