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 35 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	$	200,000
Expenses		155,800
Earnings before interest and taxes	$	44,200
Interest		8,100
Earnings before taxes	$	36,100
Taxes		16,100
Earnings after taxes	$	20,000
Dividends	$	7,000

Balance Sheet
Assets			Liabilities and Stockholders' Equity
Cash	$	5,000	Accounts payable	$	20,000
Accounts receivable		35,000	Accrued wages		1,750
Inventory		60,000	Accrued taxes		4,250
Current assets	$	100,000	Current liabilities	$	26,000
Fixed assets		91,000	Notes payable		8,100
			Long-term debt		20,500
			Common stock		115,000
			Retained earnings		21,400
Total assets	$	191,000	Total liabilities and stockholders' equity	$	191,000

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.)