Example of sales method, Finance Basics

Example of Sales Method

The balance sheet of XYZ Ltd as on date 31st December 2002 is as following:       

 

Net fixed asset

Current assets

 

Financed by:

Ordinary share capital

Retained earnings

10% debentures

Trade creditors

Accrued expenses

Sh.'000'

300

100

400

 

100

70

150

50

  30

400

Additional Information

1. The sales for year 2002 amounted to Sh.500,000. The sales will increase with 15% in year 2003 and 10% in year 2004.

2. The after tax return on sales is 12% that shall be maintained in future.

3. The company's dividend payout ratio is 80%. This will be sustained in forecasting period.

4. Any additional financing from external sources such will be affected with the issue of commercial paper via company.

Required

a) Determine the amount of external finance for 2 years upto 31st December 2004.

b) Prepare a performa balance as on date 31 December 2004

Solution

Identify various items in balance sheet directly along with sales as:

  1. Accrued expenses
  2. Trade creditors
  3. Current Asset
  4. Fixed Asset

Net fixed assets   =     (300M/500M) x 100   =  60%

Current Assets     =     (100M/500M )x 100   =  20%    

Trade creditors      =    (50/50) x 100             = 10%

Accrued expenses =    ( 30/500) x 100          =   6%

a) Compute the increase in sales over the 2 years.

Year 2002 sales           =500 * (115/100) =575M       

Year 2003 sales           = 575* (115/100) = 632M      

Increase in sales in 2003-03-26=        632.5 - 500     =          132.5M

b) Compute the amount of external requirement of the firm over the 2 years of forecasting period.

i) Increase in F. Assets                    =          % of sales x increase in sales

                                                        =          60% x 132.5  =  79.5M

ii) Increase in C. Assets = % of sales x increase in sales

                                                       =          20% of 132.5  =  26.5M

  Total additional investment/asset required                          106M

Interpretation

For the company to earn increase in sales of 132.5M it will have to acquire additional assets costing 106M.

                                                                                                                                    Sh.'000'

Additional investment/asset required                                                                        106,000

Less: Spontaneous source of finance

Increase in creditors   = % of sales x increase in sales

                                    = 132,500 x 10%                                                                     (13,250)

Increase in accrued expenses = % of sales x increase in sales         

                                                            = 132,500 x 6%                                               (7,950)

Less: Retained earnings during 2 years of operation (initial sources)

            Net profit for 2003      = Net profit margin x sales of 2003

                                                = 12% of 575,000                    =          69,000

            Less: Dividend payable 80% of 69,000                                   =55,200           (13,800)

            Net profit for 2004      = Net profit margin x sales of 2004

                                                = 12% of 632,500                    =          75,900

            Less: dividend payable 80% of 75,900                                    =60,720          (15,180)

External financial needs (commercial paper)                                                               55,820

Posted Date: 1/30/2013 2:46:05 AM | Location : United States







Related Discussions:- Example of sales method, Assignment Help, Ask Question on Example of sales method, Get Answer, Expert's Help, Example of sales method Discussions

Write discussion on Example of sales method
Your posts are moderated
Related Questions
Creditors Payment Period Ratio Creditors payment period =   365/ Creditors turnover                                           = (365 x Average creditors)/Annual credit pu

Investment  Attributes/  Factors  Influencing  Selection  of  Investment In  choosing specific  investments,  investors  would require definite  ideas  regarding  features

when will I receive my order and how will I receive it?

Methods or Techniques of Financial Forecasting 1. Use of Cash Budgets A cash budget is a financial statement showing as: a) Sources of capital and revenue cash inflows


Yard Stick Required in Ratio Analysis 1. Past performance of the company The company's previous performance past ratio is needed to gauge or measure the company's present

if u were the professor wht your opinion about vincent mind stage

a.  In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if t

Valuation of Share A number of parties are interested however in the value of shares and securities and that will include: Company shareholders, vendors and directors of

Mermaid Coffee Corporation (MCC) has 1,000,000 shares of stock currently trading at $42 per share. The company has issued 20,000 bonds, each with market value $928.59 and yield to