CS Executive · Corporate Accounting and Financial Management · Forecasting Financial Statements
Under the percentage of sales method of forecasting financial statements, which assumption is made about the items that are linked to sales?
The percentage of sales method assumes that sales-linked items such as receivables, inventory and trade payables keep a constant ratio to sales. They therefore rise or fall in proportion to sales, and the forecast balance sheet is built from these ratios.
- AThey stay constant in rupee terms whatever the level of sales
- BThey change in the same proportion as sales, so their ratio to sales stays constantCorrect
- CThey change only when the company raises long-term debt
- DThey move in the opposite direction to sales
Explanation
The percentage of sales method assumes that items such as inventory, receivables and payables keep a constant ratio to sales, so they grow in step with sales. Holding them fixed in rupee terms would be the fixed-item approach, not this method.
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