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Quest ion
In mid-2007, Eco-Product s' management prepared a five-year (2007-2011) project ion of revenues and expenses (see Table 1 ). What annual rat es of growt h were project ed for
net sales? Make a "back-of-t he-envelope" est imat e of t he amount s of addit ional asset s needed t o support t he sales forecast s. How might t hese asset s be financed? Prepare a
"rough" est imat e of t he possible size of ext ernal financing needed t o support t hese sales project ions.
Answer & Explainat ion
Explaination
Step 1
Const ruct a schedule in t he books of Incorporat ion E t o est imat e t he change in project ed sales and t he percent age increase in sales for t he Years 2007 t o 2011.
Under column (a), record t he project ed sales revenue for t he Years 2007, 2008, 2009, 2010 and 2011 which are $9,200,000, $22,000,000, $38,000,000, $55,000,000 and
$78,000,000 respect ively.
Under column (b), comput e t he amount of change in project ed sales for each of t he years by subt ract ing t he current year sales from t he previous year's sales.
Under column (c), calculat e t he percent age increase in sales for each of t he years by dividing t he current year's change in project ed sales by t he previous year's project ed sales.
Const ruct a schedule in t he books of Incorporat ion E t o est imat e t he change in project ed sales and t he percent age increase in sales for t he Years 2007 t o 2011.
Under column (a), record t he project ed sales revenue for t he Years 2007, 2008, 2009, 2010 and 2011 which are $9,200,000, $22,000,000, $38,000,000, $55,000,000 and
$78,000,000 respect ively.
Under column (b), comput e t he amount of change in project ed sales for each of t he years by subt ract ing t he current year sales from t he previous year's sales.
Under column (c), calculat e t he percent age increase in sales for each of t he years by dividing t he current year's change in project ed sales by t he previous year's project ed sales.
Step 2
Comput e t he compounded sales growt h rat e by using t he EXCEL RATE funct ion which is =RATE (NPER, PMT, PV, [FV], [TYPE], [GUESS]) wit h t he following input s:
NPER= 5 (The number of years from 2006 t ill 2011)
PMT= 0
PV= $5,751,787 (The sales of t he Year 2006)
FV= $78,000,000 (Project ed sales of t he Year 2011, t ake t his figure as negat ive for t he funct ion t o work properly)
TYPE= 0 (For t he end of t he Year)
GUESS= 0
​
= RATE(NPER,PMT,PV,[FV],[TYPE],[GUESS])
= RATE(5, 0, $5, 751, 787, −78, 000, 000, 0, 0)
= 68.45%
​
Step 3
Calculat e t he t ot al asset s t o sales rat io for t he Year 2007 by dividing t he t ot al asset s which are $5,647,015 by t he net revenue which is $10,867,104.
Total Assets
Net Revenue
$5, 647, 015
=
$10, 867, 104
= 51.96%
Total Assets to Sales Ratio =
​
​
​
​
Step 4
Const ruct a schedule in t he books of Incorporat ion E t o comput e t he required increase in asset s t o support t he increase in sales for t he Years 2007 t o 2011.
The act ual sales revenue for t he Year 2007 is $10,867,104.
The project ed sales revenues for t he Year 2008, 2009, 2010 and 2011 are $22,000,000, $38,000,000, $55,000,000 and $78,000,000 respect ively.
Under column (a), record t he sales revenue for each of t he years.
Under column (b), comput e t he amount of change in sales for each of t he years by subt ract ing t he current year sales from t he previous year sales.
Under column (c), record t he t ot al sales t o asset rat io which is 51.96% for each of t he years.
Under column (d), mult iply t he figures of column (c) wit h t he corresponding figures of column (b) t o est imat e t he change in asset s.
Const ruct a schedule in t he books of Incorporat ion E t o comput e t he required increase in asset s t o support t he increase in sales for t he Years 2007 t o 2011.
The act ual sales revenue for t he Year 2007 is $10,867,104.
The project ed sales revenues for t he Year 2008, 2009, 2010 and 2011 are $22,000,000, $38,000,000, $55,000,000 and $78,000,000 respect ively.
Under column (a), record t he sales revenue for each of t he years.
Under column (b), comput e t he amount of change in sales for each of t he years by subt ract ing t he current year sales from t he previous year sales.
Under column (c), record t he t ot al sales t o asset rat io which is 51.96% for each of t he years.
Under column (d), mult iply t he figures of column (c) wit h t he corresponding figures of column (b) t o est imat e t he change in asset s.
Step 5
Prepare a schedule t o project t he income st at ement , and balance sheet for Incorporat ion E for t he years 2008, 2009, 2010 and 2011.
The income st at ement det ermines t he net income of t he business by subt ract ing t he t ot al expenses from t he t ot al revenue.
Prepare t he project ed income st at ement for Incorporat ion E for t he years 2008, 2009, 2010 and 2011.
For each it em of t he income st at ement , est imat e t he percent age of sales for t he Year 2007, by dividing t he respect ive amount s of t he it ems of t he income st at ement by t he
sales of t hat year.
The forecast ed sales for t he Year 2008, 2009, 2010 and 2011 is $22,000,000, $38,000,000, $55,000,000 and $78,000,000 respect ively.
The net revenue and t he cost of goods sold for t he Year 2007 are $10,867,104 and $7,726,455 respect ively.
The sales and market ing, general and administ rat ive and depreciat ion and amort izat ion expenses for t he Year 2007 is $1,822,206, $1,102,437 and $87,563 respect ively.
The int erest expense, ot her expense and provision for income t axes for t he Year 2007 is $(186,726), $(1,192) and $(23,276) respect ively.
Comput e t he forecast ed amount s of various it ems of t he income st at ement for each of t he years by mult iplying t he per cent of sales wit h t he respect ive forecast ed sales of
t hat part icular year.
Calculat e t he gross profit by subt ract ing t he cost of goods sold from t he net revenue.
Comput e t ot al operat ing expenses by adding t he sales and market ing, general and administ rat ive and depreciat ion and amort izat ion expenses.
Det ermine operat ing profit by subt ract ing t ot al operat ing revenue from t he gross profit .
Comput e net ot her income and expenses by adding t he int erest expense and ot her expenses.
Calculat e t he net income or loss by adding operat ing profit and net ot her income and t hen subt ract ing t he provision for income t axes from t he result ing figure.
The balance sheet shows t he financial posit ion of t he company by recording all t he asset s, liabilit ies, and owner's equit y of a company at t he end of a specific year. The asset
side is equal t o t he liabilit ies & owner's equit y side.
Prepare t he project ed balance sheet for Incorporat ion E for t he years 2008, 2009, 2010 and 2011 respect ively.
Det ermine t he percent age of sales for t he Year 2007 for each it em of t he balance sheet , by dividing t he respect ive amount s of t he it ems of t he balance sheet by t he sales of
t hat year.
The amount s of deferred income t ax, long t erm debt -net of current , long t erm capit al leases-net of current , common st ock and addit ional paid-in capit al will remain const ant for
all t he years.
The cash, account s receivables, prepaid expenses/ot her, invent ory and deferred income t ax for t he Year 2007 is $51,667, $1,330,562, $793,282, $2,415,916 and $42,000
respect ively.
The propert y plant and equipment and accumulat ed depreciat ion for t he Year 2007 is $1,349,702 and $(360,304) respect ively.
The account s payable and accrued expenses, account s payroll and payroll t axes, accrued vacat ion, lines of credit , current port ion of long t erm debt , current port ion of capit al
leases, deferred revenue, loan from st ockholder, and ot her current liabilit ies for t he Year 2007 is $568,131, $6,712, $39,356, $2,843,242, $39,865, $37,919, $105,588, $93,394 and
$21,523 respect ively.
The deferred t ax liabilit y, long t erm debt -net of current , and long t erm capit al leases, net of current for t he Year 2007 are $54,000, $124,546, and $177,611 respect ively.
The common st ock, addit ional paid in capit al, and ret ained earnings for t he Year 2007 is $155,300, $1,270,908, and $108,920 respect ively.
Calculat e t he t ot al current asset s by adding t he cash, account s receivables, prepaid expenses/ot her, invent ory and deferred income t ax respect ively.
Det ermine net propert y plant and equipment by subt ract ing t he accumulat ed depreciat ion from t he amount of propert y plant and equipment .
Comput e net t angible asset s by adding t rademarks and ot hers and t hen from t he result ing figure subt ract ing t he accumulat ed amort izat ion.
Det ermine t he t ot al asset s by adding t he t ot al current asset s, net propert y plant and equipment and net t angible asset s.
Calculat e t he t ot al current liabilit ies by adding t he account s payable and accrued expenses, account s payroll and payroll t axes, accrued vacat ion, lines of credit , current port ion
of long t erm debt , current port ion of capit al leases, deferred revenue, loan from a st ockholder, and ot her current liabilit ies.
The addit ional funds needed is t he balancing figure.
Comput e t he liabilit ies by adding t he t ot al current liabilit ies, deferred income t ax liabilit y, long t erm debt - net of current , and long t erm capit al leases, net of current .
Det ermine t he t ot al owners' equit y by adding t he common st ock, addit ional paid-in capit al and ret ained earnings.
Calculat e t he t ot al liabilit ies and owners' equit y by adding t he t ot al liabilit ies and t ot al owners' equit y.
Comput e t he forecast ed amount s of various it ems on t he balance sheet by mult iplying t he per cent of sales wit h t he respect ive forecast ed sales of t hat part icular year.
Det ermine t he ret ained earnings for each year by adding t he net income or loss of t he current year wit h t he amount of ret ained earnings of t he previous year.
Prepare a schedule t o project t he income st at ement , and balance sheet for Incorporat ion E for t he years 2008, 2009, 2010 and 2011.
The income st at ement det ermines t he net income of t he business by subt ract ing t he t ot al expenses from t he t ot al revenue.
Prepare t he project ed income st at ement for Incorporat ion E for t he years 2008, 2009, 2010 and 2011.
For each it em of t he income st at ement , est imat e t he percent age of sales for t he Year 2007, by dividing t he respect ive amount s of t he it ems of t he income st at ement by t he
sales of t hat year.
The forecast ed sales for t he Year 2008, 2009, 2010 and 2011 is $22,000,000, $38,000,000, $55,000,000 and $78,000,000 respect ively.
The net revenue and t he cost of goods sold for t he Year 2007 are $10,867,104 and $7,726,455 respect ively.
The sales and market ing, general and administ rat ive and depreciat ion and amort izat ion expenses for t he Year 2007 is $1,822,206, $1,102,437 and $87,563 respect ively.
The int erest expense, ot her expense and provision for income t axes for t he Year 2007 is $(186,726), $(1,192) and $(23,276) respect ively.
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Comput e t he forecast ed amount s of various it ems of t he income st at ement for each of t he years by mult iplying t he per cent of sales wit h t he respect ive forecast ed sales of
t hat part icular year.
Calculat e t he gross profit by subt ract ing t he cost of goods sold from t he net revenue.
Comput e t ot al operat ing expenses by adding t he sales and market ing, general and administ rat ive and depreciat ion and amort izat ion expenses.
Det ermine operat ing profit by subt ract ing t ot al operat ing revenue from t he gross profit .
Comput e net ot her income and expenses by adding t he int erest expense and ot her expenses.
Calculat e t he net income or loss by adding operat ing profit and net ot her income and t hen subt ract ing t he provision for income t axes from t he result ing figure.
The balance sheet shows t he financial posit ion of t he company by recording all t he asset s, liabilit ies, and owner's equit y of a company at t he end of a specific year. The asset
side is equal t o t he liabilit ies & owner's equit y side.
Prepare t he project ed balance sheet for Incorporat ion E for t he years 2008, 2009, 2010 and 2011 respect ively.
Det ermine t he percent age of sales for t he Year 2007 for each it em of t he balance sheet , by dividing t he respect ive amount s of t he it ems of t he balance sheet by t he sales of
t hat year.
The amount s of deferred income t ax, long t erm debt -net of current , long t erm capit al leases-net of current , common st ock and addit ional paid-in capit al will remain const ant for
all t he years.
The cash, account s receivables, prepaid expenses/ot her, invent ory and deferred income t ax for t he Year 2007 is $51,667, $1,330,562, $793,282, $2,415,916 and $42,000
respect ively.
The propert y plant and equipment and accumulat ed depreciat ion for t he Year 2007 is $1,349,702 and $(360,304) respect ively.
The account s payable and accrued expenses, account s payroll and payroll t axes, accrued vacat ion, lines of credit , current port ion of long t erm debt , current port ion of capit al
leases, deferred revenue, loan from st ockholder, and ot her current liabilit ies for t he Year 2007 is $568,131, $6,712, $39,356, $2,843,242, $39,865, $37,919, $105,588, $93,394 and
$21,523 respect ively.
The deferred t ax liabilit y, long t erm debt -net of current , and long t erm capit al leases, net of current for t he Year 2007 are $54,000, $124,546, and $177,611 respect ively.
The common st ock, addit ional paid in capit al, and ret ained earnings for t he Year 2007 is $155,300, $1,270,908, and $108,920 respect ively.
Calculat e t he t ot al current asset s by adding t he cash, account s receivables, prepaid expenses/ot her, invent ory and deferred income t ax respect ively.
Det ermine net propert y plant and equipment by subt ract ing t he accumulat ed depreciat ion from t he amount of propert y plant and equipment .
Comput e net t angible asset s by adding t rademarks and ot hers and t hen from t he result ing figure subt ract ing t he accumulat ed amort izat ion.
Det ermine t he t ot al asset s by adding t he t ot al current asset s, net propert y plant and equipment and net t angible asset s.
Calculat e t he t ot al current liabilit ies by adding t he account s payable and accrued expenses, account s payroll and payroll t axes, accrued vacat ion, lines of credit , current port ion
of long t erm debt , current port ion of capit al leases, deferred revenue, loan from a st ockholder, and ot her current liabilit ies.
The addit ional funds needed is t he balancing figure.
Comput e t he liabilit ies by adding t he t ot al current liabilit ies, deferred income t ax liabilit y, long t erm debt - net of current , and long t erm capit al leases, net of current .
Det ermine t he t ot al owners' equit y by adding t he common st ock, addit ional paid-in capit al and ret ained earnings.
Calculat e t he t ot al liabilit ies and owners' equit y by adding t he t ot al liabilit ies and t ot al owners' equit y.
Comput e t he forecast ed amount s of various it ems on t he balance sheet by mult iplying t he per cent of sales wit h t he respect ive forecast ed sales of t hat part icular year.
Det ermine t he ret ained earnings for each year by adding t he net income or loss of t he current year wit h t he amount of ret ained earnings of t he previous year.
Verified Answer
The sales growt h rat es for t he Year 2008, 2009, 2010 and 2011 are 139.13%, 72.73%, 44.74% and 41.82% respect ively.
The compounded sales growt h rat e is 68.45%.
To support a t ot al change in sales of $67,132,896, a change in asset s wort h $34,882,252.78 is required. This change in asset s can be financed t hrough t he ret ent ion of profit s.
Moreover, t hey can also be financed by an increase in account s payable and accrued liabilit ies. Any amount remaining will be financed by ext ernal financing.
The addit ional funds required for t he Year 2008, 2009, 2010 and 2011 are $11,453,479.92, $21,276,397.42, $31,761,964.04 and $45,960,271.52 respect ively.