Question

Which of the following assumptions is embodied in the AFN equation?

a. All balance sheet accounts are tied directly to sales.

b. Fixed assets, but not current assets, are tied directly to sales.

c. Common stock and long-term debt are tied directly to sales.

d. Accounts payable and accruals are tied directly to sales.

e. Last year's total assets were not optimal for last year's sales.

Answer 1

Answer:

d. Accounts payable and accruals are tied directly to sales.

Explanation:

Additional funds needed method determines the amount that the company needs to finance the increase in total sales.

In response to the increase in sales, the company has to increase its assets to achieve that goal. The increase in total assets is partly offset by an increase in liabilities and the other part is offset by an increase in retained earnings.

The only true statement of the AFN equation is the option d), and the other options are not right.