6. Projected financial statements and basic analysis

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	$20,000	$24,000
Cost of goods sold	(16,000)	(19,200)
Gross profit	$4,000	$4,800
Fixed operating costs except depreciation	(1,000)	(1,200)
Depreciation	(400)	(480)
Earnings before interest and taxes	$2,600	$3,120
Interest	(400)	(400)
Earnings before taxes	$2,200	$2,720
Taxes	(880)	(1,088)
Net income	$1,320	1,632
Common dividends	(712.8)	(712.8)
Addition to retained earnings	$607.2	$919.2
Earnings per share	$66	$81.6
Dividends per share	$35.64	$35.64
Number of common shares (millions)	20.0	20.0

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

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

The forecasted increase in net sales is 20%.

Spontaneously generated funds will sufficiently cover any financing needs.

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

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

No excess capacity currently exists.

Which of the following could be a direct cause of financing feedback?

I. Issuing additional common stock

II. Purchasing additional buildings with internally generated funds

III. An unexpected increase in sales

IV. Borrowing from the bank

III

IV

I

II

I and II

I and IV

III and IV

II and IV

What is one of the potential consequences of financing feedback that might cause the actual financing needs to be higher than initially thought? Financing feedback might

spontaneously increase liabilities associated with the cost of goods sold.

increase the length of the operating cycle.

reduce the level of cash on hand.

increase charges against net income, reducing the amount of available internally generated funds.