The percent of sales method of forecasting assumes which of the following is con
ID: 2655300 • Letter: T
Question
The percent of sales method of forecasting assumes which of the following is constant? A. inventory as a percent of sales B. equity as a percent of sales C. long-term debt as a percent of total assets D. accounts payable as a percent of total assets The percent of sales method of forecasting assumes which of the following is constant? A. inventory as a percent of sales B. equity as a percent of sales C. long-term debt as a percent of total assets D. accounts payable as a percent of total assetsExplanation / Answer
Percentage to sales method is a technique of forecasting balance sheet and income statement. Here items of financial statements are assumed to have a link with sales figure. Thus sales figure of the coming period is forecasted first. Then from historical data, percentage wise link is established with different items of financial statement. Finally you have to apply those linked percentage on forecasted sales figure to develop forecasted financial statement.
However you cannot link all the items with sales here. Some figures will be there which will remain constant. In other words these figures are not directly linked with sales.
In the problem, four assumprtions are mentioned. Let us evaluate them one by one.
A. Inventory is a item which is directly linked with sales. If sales goes up then absolute value of inventory will also increase. Thus percentage wise inventory as a percentage of sales will remain constant. Suppose 10% of sales value should e maintained as inventory. This percentage will not change. So if sales moves up from $100 million to $200 million, then inventory will increase from $10 million to $20 million. Percentage of sales is not changing here. But absolute inventory is increasing with the increease in sales.
B. Second one is equity as a percentage of sales. Equity of the company has no link with the sales. In asolute term, equity remains constant. Hence with the increase in sales, the percentage of equity on sales will decrease. Suppose in this problem equity is $25 million. If sales is $100 million, then percentage of equity and sales is 25%. When sales is going up to $200 million, this percentage will drop to ($25/$200)x100 = 12.5%. Thus equity as a percentage of sales does not remain constant.
C. Long term debt as a percentage to total asset is not a relation established y this forecasting method. It establishes relation of any item with sales. So it is not linked with this method. It depends upon financing policy of the compay.
D. Fourth one is showing relation between accounts payable as a percentage to total assets. It is also not related with this forecasting technique as base variable sales is missing here.
Answer: Thus correct option is A. Inventory as a percentage of sales is constant in percentage of sales method of forecasting.
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