fm14 20 - Explain how each of the following factors would...

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Mini Case: 14 - 20 j. 2. How would the existence of excess capacity in fixed assets affect the additional funds needed during 2008? Answer: We had previously found an AFN of $184.5 using the balance sheet method. The fixed assets increase was 0.25($500) = $125. Therefore, the funds needed will decline by $125. k. The relationship between sales and the various types of assets is important in financial forecasting. The forecasted financial statements approach, under the assumption that each asset item grows at the same rate as sales, leads to an AFN forecast that is reasonably close to the forecast using the AFN equation.
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Unformatted text preview: Explain how each of the following factors would affect the accuracy of financial forecasts based on the AFN equation: (1) economies of scale in the use of assets, and (2) lumpy assets. Answer: 1. Economies of scale in the use of assets mean that the asset item in question must increase less than proportionately with sales; hence it will grow less rapidly than sales. Cash and inventory are common examples, with possible relationship to sales as shown below: Inventories Sales Base Stock Cash Sales...
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