Which of the following statements is CORRECT? Answer The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed. If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method. Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.

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Which of the following statements is CORRECT?  Answer       The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.       Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.       A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.       If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.       Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.

Cash	$ 3.5	Accounts payable	$ 9.0
Receivables	26.0	Notes payable	18.0
Inventories	58.0	Line of credit	0
Total current assets	$ 87.5	Accruals	8.5
Net fixed assets	35.0	Total current liabilities	$ 35.5
		Mortgage loan	6.0
		Common stock	15.0
		Retained earnings	66.0
Total assets	$122.5	Total liabilities and equity	$122.5

Upton Computers Pro Forma Balance Sheet December 31, 2014 (Millions of Dollars)
Cash	$
Receivables	$
Inventories	$
Total current assets	$
Net fixed assets	$
Total assets	$
Accounts payable	$
Notes payable	$
Accruals	$
Total current liabilities	$
Mortgage loan	$
Common stock	$
Retained earnings	$
Total liabilities and equity	$

	2013	Proj 2014
Current Assets Cash	$ 20
Accounts Receivable	$ 240
Inventory	$ 240
Total Current Assets	$ 500
Net Plant & Equipment	$ 500
Total Assets	$ 1,000

Liabilities & Owners Equity
Accounts Payable	$ 100
Notes Payable	$ 100
Total Current Liabilities	$ 200
Long Term Debt	$ 100
Total Liabilities	$ 300
Common Stock	$ 500
Retained Earnings	$ 200
Total Stockholders' Equity	$ 700
Total Liabilities, Equity	$ 1,000

Income Statement Sales	$ 2,000
COGS	$ 1,200
Gross profit	$ 800
Selling and Admin Expense	$ 700
EBIT	$ 100
Interest Expense	$ 10	$ 20
EBT	$ 90
Taxes @ 40%	$ 36
Net Income	$ 54
Common Dividend	$ 21.6
Addition to Retained Earnings	$ 32

1) 30% TWO PARTS: A) Using the above data and the AFN equation, compute the additional funds needed for 2014 if sales growth is expected to be 25% and the firm is operating at 100% capacity. B) Use the forecasted financial statements approach to compute additional funds needed if we assume all additional funds will be financed equally with notes payable and long-term debt. Assume "dividend payout ratio" in 2014 is the same ratio with 2013.

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		The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
		Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
		A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.
		If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.
		Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.