Problem 4-28 Percent-of-sales method [LO4-3]

The Manning Company has financial statements as shown next, which are representative of the companys historical average.

The firm is expecting a 40 percent increase in sales next year, and management is concerned about the companys 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.

Income Statement
Sales	$	240,000
Expenses		179,000
Earnings before interest and taxes	$	61,000
Interest		8,500
Earnings before taxes	$	52,500
Taxes		16,500
Earnings after taxes	$	36,000
Dividends	$	16,200

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	3,000	Accounts payable	$	29,600
Accounts receivable		52,000	Accrued wages		1,950
Inventory		65,000	Accrued taxes		4,450
Current assets	$	120,000	Current liabilities	$	36,000
Fixed assets		95,000	Notes payable		8,500
			Long-term debt		22,500
			Common stock		119,000
			Retained earnings		29,000
Total assets	$	215,000	Total liabilities and stockholders' equity	$	215,000

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.) (Do not round intermediate calculations.)