An important reason for making financial projections is fore

An important reason for making financial projections is forecasting whether the firm will need money from outside sources in the coming year. If the planning assumptions result in a need for extra money, it shows up in the plan as:

Select one:

a. a negative net income.

b. a negative equity account.

c. an increase in debt.

d. a very substantial drop in revenue.

Solution

a. a negative net income.

Retained earnings is enetered in the equity section of the balance sheet. If you had retained earnings of $30,000 last year and $50,000 in earnings this year, the total is $80,000, less any dividends paid out. You don\'t have to retain the earnings as cash in the bank. If you invest the $80,000 in a massive equipment upgrade, that doesn\'t affect the equity.If instead of $50,000 in earnings, you run a $35,000 loss, then your retained earnings figure becomes a $5,000 negative entry. Red ink in this account is known as accumulated deficit.

Dividends may be a factor. Dividends reduce retained earnings just like losses do. When you give dividends, you have less to contribute to retained earnings. It\'s possible the accumulated deficit results from too big a dividend and not retaining enough earnings. You may have to cut back on future dividends to avoid it happening again. Some businesses have run into trouble using borrowed money to pay dividends even when the company\'s unprofitable.