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The Additional Funds Needed Equation (AFN) can be "intuitively interpreted" as "Outside
Funds Needed = Assets I need to support the sales increase - Spontaneous Increases in Accounts
Payable and Accruals - Additions to Retained Earnings". True or false?
Solution
True,
Explanation: AFN equation = A0 x change in sales/current sales – L0 x change in sales/current
sales – S1 x PM x b
Here, A0 = current level of assets
L0 = Current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention ratio

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The Additional Funds Needed Equation (AFN) can be intuitively inte.pdf

  • 1. The Additional Funds Needed Equation (AFN) can be "intuitively interpreted" as "Outside Funds Needed = Assets I need to support the sales increase - Spontaneous Increases in Accounts Payable and Accruals - Additions to Retained Earnings". True or false? Solution True, Explanation: AFN equation = A0 x change in sales/current sales – L0 x change in sales/current sales – S1 x PM x b Here, A0 = current level of assets L0 = Current level of liabilities S1 = new level of sales PM = profit margin b = retention ratio