Question 2

a) Briefly explain the meaning of financial forecasting. (2 Marks)

b) Briefly describe the various methods of financial forecasting. (8 Marks)

c) Study the income statement and balance sheet shown on the next page and answer the following questions. Table 1: Balance Sheet for 2021 Account Amount (K) Noncurrent assets Inventory Accounts Receivables Bank 140,000 30,000 28, 000 5,000 Total Assets 203,000 Accounts payables Notes payables 8% Loan Ordinary share capital Retained profits 12,000 15,000 50,000 100,000 26,000 Total liabilities and Equity 203,000 Table 2: Income statement for 2021 Account Amount (K) Sales Less cost of sales 280,000 (210,000) Gross Profit Less: Administration expenses 70,000 46,000 Net Profit (Earnings before tax) Less: Interest on loan 24,000 4,000 Earnings before tax Less tax (30%) 20,000 6,000 Net income Less: Dividend Retained earnings 14,000 5,000 9,000 Supposing that the 2022 sales are projected to increase by 25% over the year 2021 sales and that there is proportional relationship between sales to operating costs, interest expenses, current assets and spontaneous liabilities. The company has been operating at full capacity and planned to maintain the dividend ratio and profit margin position of the previous year. Required

i. Using the Percentage of Sales method, compute the additional funds needed (AFN), assuming that the company was operating at full capacity in the year 2021. (8

ii. Using the Formula method, compute the additional funds needed, assuming that the company was operating at full capacity in the year 2021. (4 Marks)