40.

AFN and current ratio Answer: e Diff: T

RR = (1 - d) = (1 - 0.6) = 0.4.

Step 1: AFN = A*/S0(S) - L*/S0(S) - M(S1)(RR)

$10,000 $1,500
= ($5,000) - ($5,000) - 0.11($15,000)(0.4)
$10,000 $10,000
= 1($5,000) - 0.15($5,000) - 0.11($15,000)(0.4)
= $5,000 - $750 - $660 = $3,590.

Step 2: Current assets will increase to $7,000/$10,000  $15,000 = $10,500.

Current liabilities will increase to:
$1,500
A/P + Accrued liabilities =  $15,000 = $2,250
$10,000
S-T Debt = $2,000 + $3,590 = 5,590
Total C.L. = $7,840

New current ratio = $10,500/$7,840 = 1.34.

41. Regression analysis vs. percent of sales Answer: b Diff: T

RR = (1 - d) = (1 - 0.5) = 0.5.

Formula method:
AFN = (A*/S0)S - (L*/S0)S - MS1(RR)
= $400/$400($200) - $80/$400($200) - 0.08($600)(0.5)
= $200 - $40 - $24
= $136.

Of that amount, inventories are projected to increase by $100/$400($200) =

$50. 2003 inventories = $100 + $50 = $150.

Regression analysis:
Inventories = Y variable. (dependent)
Sales = X variable. (independent)

Input values in calculator to obtain the following regression equation:

Inventories = $30 + 0.10(Sales).

Project 2003 inventories by substituting 2003 sales into the regression

equation as follows:
Inventories = $30 + 0.10($600) = $90.

Thus, inventories would decrease by $10 from the 2002 level: $100 - $90.
AFN would be lowered by $150 - $90 = $60 (surplus). AFN = -$60.

Chapter 17 - Page 33