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CS Executive · Corporate Accounting and Financial Management · Forecasting Financial Statements

In the percentage-of-sales method of forecasting financial statements, which assumption is made about the items that are expected to vary with sales?

Items that vary with sales are assumed to maintain the same percentage of sales as in the base year. Forecast sales are multiplied by these ratios to estimate costs, receivables, inventory and payables, which is the core assumption of the percentage-of-sales method.

  1. AThey remain at the absolute amount of the previous year
  2. BThey keep the same percentage relationship to sales as in the base yearCorrect
  3. CThey change only when new long-term borrowing is raised
  4. DThey are forecast using the previous year's growth rate of net profit

Explanation

The percentage-of-sales method expresses spontaneous items such as costs, receivables, inventory and payables as a fixed percentage of sales in the base year. The forecast sales figure is then multiplied by these percentages. Holding items at last year's absolute amount ignores the link with sales, so that option is wrong.

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