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CS Executive · Corporate Accounting and Financial Management · Forecasting Financial Statements

Bharat Auto Ltd forecasts next year's sales at ₹50,00,000. Total assets are 80% of sales and are expected to vary directly with sales. Spontaneous liabilities (trade payables and accruals) are 20% of sales. Current-year sales were ₹40,00,000. Net profit margin is 10% and the company retains 60% of profit. What is the external financing required (additional funds needed)?

External financing required is ₹3,00,000. Assets rise by ₹8,00,000 (80% of the ₹10,00,000 sales increase), spontaneous liabilities rise by ₹2,00,000, and retained profit is ₹3,00,000 (60% of ₹5,00,000). So 8,00,000 − 2,00,000 − 3,00,000 equals ₹3,00,000.

  1. A₹1,00,000Correct
  2. B₹2,00,000
  3. C₹3,00,000
  4. D₹5,00,000

Explanation

Increase in sales = ₹10,00,000. Increase in assets = 80% × 10,00,000 = ₹8,00,000. Increase in spontaneous liabilities = 20% × 10,00,000 = ₹2,00,000. Retained earnings = 10% × 50,00,000 × 60% = ₹3,00,000. AFN = 8,00,000 − 2,00,000 − 3,00,000 = ₹3,00,000. Re-check of option: the key must be ₹3,00,000, so the answer is the third option.

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