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- W2019435990 abstract "One of the computational nuisances encountered by students and practitioners when preparing financial projections is the balancing problem, which results from the fact that projected total assets rarely equal projected total liabilities and equity. The imbalance is usually corrected by increasing projected assets or liabilities and equity by a This would seem like a simple enough problem except that the plug figure usually represents either projected excess funds or the need for additional financing, either of which can affect the projected income statement. For example, if projected total assets exceed total liabilities and equity, the plug figure represents the need for additional financing. If treated as debt, interest expense on the income statement must be increased. This reduces taxable income which, in turn, reduces income tax expense and net income. The reduction in net income reduces retained earnings on the balance sheet, thereby causing the balance sheet to again be out-of-balance. The plug figure must be increased to cover the effect of the after-tax interest expense. But once it is increased, interest expense must again be increased (i.e., interest on interest) and the process is repeated. The result is a seemingly never-ending circle of computations, at least until the amount of the imbalance is insignificant. When projected total liabilities and equity exceed total assets, the required plug figure represents excess funds, which could be used to reduce existing debt or simply held in the form of interest-bearing securities. In either case, the income statement would be affected by the additional income. This increases taxable income, income taxes, net income, and finally retained earnings on the balance sheet, thus again invalidating the original plug figure. The balance sheet does not balance and the circle of computations begins again. The foregoing problems of simultaneity can be further complicated by other projection interrelationships. For example, accrued income taxes on the balance sheet is usually projected as a function of income tax expense and would therefore be affected by the tax effects of the plug figure. Similarly, common dividends might be projected as a percentage of net income. Since the plug figure affects net income, common dividends in this case will also be affected. Similar comments can be made regarding bonuses and profit sharing. The author appreciates David E. Jensen's comments on the first draft and subsequent suggestions from Robert A. Taggart and two anonymous referees." @default.
- W2019435990 created "2016-06-24" @default.
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- W2019435990 date "1987-01-01" @default.
- W2019435990 modified "2023-09-26" @default.
- W2019435990 title "A Note on Solving the Balancing Problem" @default.
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- W2019435990 doi "https://doi.org/10.2307/3665550" @default.
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