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External Financing Needed for Expansion

The plug figure in pro forma financial statements represents the External Financing Needed (EFN) to balance projected assets with projected liabilities and equity. If projected assets exceed liabilities and retained earnings, the plug is a positive EFN, indicating new financing is required. A calculation example shows that with a change in assets of $900, the EFN is determined to be $400, confirming the statement is true.

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146 views2 pages

External Financing Needed for Expansion

The plug figure in pro forma financial statements represents the External Financing Needed (EFN) to balance projected assets with projected liabilities and equity. If projected assets exceed liabilities and retained earnings, the plug is a positive EFN, indicating new financing is required. A calculation example shows that with a change in assets of $900, the EFN is determined to be $400, confirming the statement is true.

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Thanh Trà
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© © All Rights Reserved
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The correct option is c. the external financing needed to support the financial plan.

In the context of pro forma financial statements and the percentage of sales approach, the plug
figure is the amount added to the right side of the projected balance sheet (Liabilities and
Equity) to make the balance sheet equation balance.

$$\text{Projected Assets} = \text{Projected Liabilities} + \text{Projected Equity} + \textbf{Plug


Figure}$$

This plug figure represents the External Financing Needed (EFN)—the amount of new debt or
equity financing the firm must raise to fund the asset growth required by the projected sales.

 If the projected assets exceed the projected liabilities and retained earnings, the plug is
a positive EFN.

 If the projected liabilities and retained earnings exceed the projected assets (a rare
case), the firm has a financial surplus, and the plug can be used to pay off debt or buy
back stock.

The statement is True.

Here is the calculation to determine the External Financing Needed (EFN):

The External Financing Needed (EFN) is the amount required to balance the change in assets
with the change in liabilities and equity.

The basic relationship is:

$$\Delta \text{Assets} = \Delta \text{Spontaneous Liabilities} + \Delta \text{Retained Earnings} +


\text{EFN}$$

Plugging in the given values:

 Change in Assets ($\Delta \text{Assets}$): $900

 Change in Current Liabilities ($\Delta \text{CL}$, assumed to be spontaneous): $300

 Change in Retained Earnings ($\Delta \text{RE}$): $200

$$\$900 = \$300 + \$200 + \text{EFN}$$

$$\$900 = \$500 + \text{EFN}$$

$$\text{EFN} = \$900 - \$500$$

$$\text{EFN} = \$400$$

Since the calculated EFN is $400, the statement is True

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