The AFN equation and the financial statement-forecasting approach both relationship between assets and sales is often a little more difficult than th assets needed to support a given level of sales. General Forge and Foundry Co. has used its historical sales and asset data Accounts Receivable Inventories = -$98,770+ 0.249(Sales) $10,120+ 0.211(Sales)
The AFN equation and the financial statement-forecasting approach both relationship between assets and sales is often a little more difficult than th assets needed to support a given level of sales. General Forge and Foundry Co. has used its historical sales and asset data Accounts Receivable Inventories = -$98,770+ 0.249(Sales) $10,120+ 0.211(Sales)
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:5. Using regression analysis to forecast assets
The AFN equation and the financial statement-forecasting approach both assume that assets grow at relatively the same rate as sales. However, the
relationship between assets and sales is often a little more difficult than that. In particular, some firms use regression analysis to predict the required
assets needed to support a given level of sales.
General Forge and Foundry Co. has used its historical sales and asset data to estimate the following regression equations:
Accounts Receivable
Inventories
-$98,770+ 0.249(Sales)
$10,120+ 0.211(Sales)
General Forge and Foundry Co. currently has sales of $1,230,000, but it expects sales to grow by 10% over the next year. Use the regression models
to calculate General Forge and Foundry Co.'s forecasted values for accounts receivable and inventories needed to support next year's sales.
Forecasted Values for Next Year
Accounts receivable
Inventories
Based on the next year's accounts receivable and inventory levels predicted by General Forge and Foundry Co.'s regression equations, the firm's DSO
for next year is expected to be
Use 365 days as the length of a year in all calculations.
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