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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark(P) next to those items that typically increase spontaneously

Accounts payable ____________
Notes payable to banks ____________
Accrued wages ____________
Accrued taxes ____________
Mortgage bonds ____________
Common stocks ____________
Retained earnings ____________

Summary Introduction

To identify: Whether the certain liability and net worth generally increase spontaneously with an increase in sales.

Introduction:

Liabilities:

Liabilities refers to the amount, which a company borrows and for that company is liable to pay that amount within a certain period of time. Liabilities are company’s legal debt that a company borrows to expand its operations.

Sales:

Sales refers to the revenue that a company generates by selling its products after deducting the amount of sales allowance, sales returns, and sales discount.

Net Worth:

Net worth is the excess of company’s assets over its liabilities. It is the actual value of company’s assets minus company’s liabilities.

Additional Fund Needed:

Additional fund needed is also known as external financing needed. It is the state in which a company needed finance to increase its operation. Additional fund needed is a method in which a company raises the funds through external resources to increase its assets, which would increase the sales revenue of the firm.

But according to additional fund needed method, a company does not change its financial ratio. Liabilities and retained earnings spontaneously increase with the increase in sales and assets.

Explanation
  • As a company wants to increase its sales, it will lead to additional purchase to increase the inventories. Purchase will automatically increase accounts payable, which state about the amount that a company has to pay to its suppliers.
  • To increase the sales, company needs more workers...

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