[Manny212]

I just did a finance problem on pro forma statments and external financing but it just doesnt seem to add up. Heres the question and a scan of my work.

Q = Sales for 2007 are projected to grow by 20%. Interest expense will remain constant; the tax rate and dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously with sales. If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20% growth rate in sales?



As you can see, my 07 liabilites are much higher than my 07 assets. In order to need External financing, my liabilities should be lower than my assets. What did i do wrong here?

[SE3P_to_E90]

did you take into account: Depreciation and Amortization expenses?
Why is Notes Payable not affected by the 20% increase for 07?

[Manny212]

Originally Posted by SE3P_to_E90

did you take into account: Depreciation and Amortization expenses?
Why is Notes Payable not affected by the 20% increase for 07?

i actually just figured it out...very easy too.

Fixed assets always have to move proportionate to sales so i raised it by 20% and it fixed my problem. It's just one of those rules where you have to assume it does so. On the liabilities side, nothing really changes except for accounts payable and retained earnings.

[SE3P_to_E90]

Originally Posted by Manny212

i actually just figured it out...very easy too.

Fixed assets always have to move proportionate to sales so i raised it by 20% and it fixed my problem. It's just one of those rules where you have to assume it does so. On the liabilities side, nothing really changes except for accounts payable and retained earnings.

in short -- good job figuring out the problem yourself... it's always rewarding to be confronted w/ a tricky problem and solving it yourself...

Anyway, just out of curiosity... if revenues/sales increase, on an economic standpoint, why would fixed assets increase? (esp taking into consideration that the mortage side of finance is tanked)

I mean, i have to brush up on my financial accounting (by all means), but wouldn't it make more sense to depreciate FA -- esp since the FA is in the form of equipment (durable good)...
Also, wouldn't it also alter the Income Statement if the FA was acquired through loans (i.e. N/P, amortization, and there's interest expense on it...)?

[Manny212]

Originally Posted by SE3P_to_E90

in short -- good job figuring out the problem yourself... it's always rewarding to be confronted w/ a tricky problem and solving it yourself...

Anyway, just out of curiosity... if revenues/sales increase, on an economic standpoint, why would fixed assets increase? (esp taking into consideration that the mortage side of finance is tanked)

I mean, i have to brush up on my financial accounting (by all means), but wouldn't it make more sense to depreciate FA -- esp since the FA is in the form of equipment (durable good)...
Also, wouldn't it also alter the Income Statement if the FA was acquired through loans (i.e. N/P, amortization, and there's interest expense on it...)?

well the reason why in this case it raised proportionate to sales was because the company was working at full capacity and it needed additional fixed assets in order to do so. In most cases it actually doesn't raise proportionate to sales. But for this case it did. Pretty much just aced my midterm too...2 more to go for the week :sad0147:

[SE3P_to_E90]

Originally Posted by Manny212

well the reason why in this case it raised proportionate to sales was because the company was working at full capacity and it needed additional fixed assets in order to do so. In most cases it actually doesn't raise proportionate to sales. But for this case it did. Pretty much just aced my midterm too...2 more to go for the week :sad0147:

these hypothetical questions are annoying...
good to hear you did well...
as for me, i'm working on this 20pg economics of antitrust paper...

[hks786]

Originally Posted by SE3P_to_E90

in short -- good job figuring out the problem yourself... it's always rewarding to be confronted w/ a tricky problem and solving it yourself...

I wish that was the case for me. I'm studying Accountancy and I've got such a lot of work to catch up on. But it's not just a case of catching up, I'm not understanding a lot of it...:sad0147:

[SE3P_to_E90]

Originally Posted by hks786

I wish that was the case for me. I'm studying Accountancy and I've got such a lot of work to catch up on. But it's not just a case of catching up, I'm not understanding a lot of it...:sad0147:

Accounting is pretty straight forward... don't take it for more than it is... if you're struggling how Balance sheets, income statements, statements of retained earnings, statements of cash flows are all interrelated, it might be of service to you if you go out and buy (or order) a basic valuation, or elements/principles of accounting book (like an extremely condensed version) to see catch up on (and understand) how these statements affect one another.

Once you have a basic ideal ~ i.e. what belongs in which category, what affects what, etc ~ you'll find that it's a lot easier to understand and tackle the tougher questions.

Accounting (at face value) could be somewhat tricky -- especially if you cram for an exam -- because there are so many different elements that belong in each category [and how a change in one part changes the value of another], having a solid understanding of the basics will definitely help you out in the long-run.

The book (Vault's Guide to Finance Interviews) gives you a solid footing on the rudimentary basics of accounting. It's also good to have once you start applying for jobs.

When i took Financial Accounting, i regret cramming and the like, so i didn't perform nearly at the level of my capacity. Now that i look back, i wish i understood the very basics before trying to figure out FCFs, WACCs, etc.

Good luck

[hks786]

Thanks for that. Yeah I'm tryna understand the basics before I go into anything advanced. I dont want to cram either, I've went down that road before! At the moment I'm studying Financial Accounting, Business Law & Corporate Finance. Anyway, I'm gonna hit the books again

Oh yeah, and I agree that it def looks hard because of all the different aspects to cover. I have Frank Wood's book and so far I see that it's a great book, but I'm just having some trouble understanding basic concepts. I'm sure when I get into it it'll be easier...

[SE3P_to_E90]

Originally Posted by hks786

Thanks for that. Yeah I'm tryna understand the basics before I go into anything advanced. I dont want to cram either, I've went down that road before! At the moment I'm studying Financial Accounting, Business Law & Corporate Finance. Anyway, I'm gonna hit the books again

Oh yeah, and I agree that it def looks hard because of all the different aspects to cover. I have Frank Wood's book and so far I see that it's a great book, but I'm just having some trouble understanding basic concepts. I'm sure when I get into it it'll be easier...

if you're taking Corp Fin... you should [theoretically] be having more trouble with that, than Fin. Accting.
Corp Fin. actually uses the principles underlying Fin Accting to derive a firm's value, etc...

[Manny212]

yea all this i just did was all for Corporate Finance, which i find really fun to be honest. I took Financial accounting and Managerial accounting my Freshman year and aced both classes. Didn't really have much trouble with them but they were a bit annoying. I take my last accounting course next semester.

the main problem with these kinds of courses is that you can't really cram( which i still do). It's mostly remembering what goes where and it's important to remember these things for the long term. Cramming won't help you remember much. I especially remember some of the business law classes i took freshman year, so much damn crap to remember and all the tests were like cases to solve.

[jlspeed29]

man...im sure glad im not in school anymore..lol..its amazing how much i forgot
and i was a finance major/econ minor too!

[hks786]

Originally Posted by Manny212

yea all this i just did was all for Corporate Finance, which i find really fun to be honest. I took Financial accounting and Managerial accounting my Freshman year and aced both classes. Didn't really have much trouble with them but they were a bit annoying. I take my last accounting course next semester.

the main problem with these kinds of courses is that you can't really cram( which i still do). It's mostly remembering what goes where and it's important to remember these things for the long term. Cramming won't help you remember much. I especially remember some of the business law classes i took freshman year, so much damn crap to remember and all the tests were like cases to solve.

haha, it's the other way around for me. I find Corp Finance and Financial Accounting harder than business law. Business law has a more "common sense" approach, but yes you do need to refer to case law and statute in your answers

[SE3P_to_E90]

Originally Posted by hks786

haha, it's the other way around for me. I find Corp Finance and Financial Accounting harder than business law. Business law has a more "common sense" approach, but yes you do need to refer to case law and statute in your answers

+1