You are the most creative analyst for Avatar Animators Inc., and your admirers want to see you work your analytical magic once more.

	2016 Actual Results	2017 Initial Forecast
Net sales	$16,000	$19,200
Cost of goods sold	(12,800)	(15,360)
Gross profit	$3,200	$3,840
Fixed operating costs except depreciation	(800)	(960)
Depreciation	(320)	(384)
Earnings before interest and taxes	$2,080	$2,496
Interest	(320)	(320)
Earnings before taxes	$1,760	$2,176
Taxes	(704)	(870.4)
Net income	$1,056	1,305.6
Common dividends	(570.24)	(570.24)
Addition to retained earnings	$485.76	$735.36
Earnings per share	$52.8	$65.28
Dividends per share	$28.512	$28.512
Number of common shares (millions)	20.0	20.0

1/ Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

No excess capacity currently exists.

The forecasted increase in net sales is 20%.

Avatar Animators Inc. will be issuing additional shares of common stock in the coming year.

The cost of sales percentage for Avatar Animators Inc. will decrease due to economies of scale.

Spontaneously generated funds will sufficiently cover any financing needs.

Avatar Animators Inc. will be issuing additional debt in the coming year.

2/ If Avatar Animators Inc. had neither a sufficient amount of excess capacity to handle forecasted increases in operations nor the level of retained earnings required to increase asset levels up to the necessary level for production, this difference would be referred to as and could be acquired in which of the following forms?

I. Issuing additional common stock

II. Borrowing from a bank using notes payable

III. Issuing long-term bonds

I, II, and III

Just II

II and III

Just III

I only

I and II