1215

Which item is least likely assumed to be a constant percentage of sales on a pro forma balance sheet?

A) Property, plant and equipment.

B) Long-term debt.

C) Inventory.

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The projected level of long-term debt will depend on the financing need or surplus that results from the net income projection and the assumptions about how the surplus will be used or the need will be financed. Current assets, long-term assets, and current liabilities are all more likely to grow proportionately with sales.

1215

Jane Epworth, CFA, is preparing pro forma financial statements for Gavin Industries, a mature U.S. manufacturing firm with three distinct geographic divisions in the Midwest, South and West. Epworth prepares estimates of sales for each of Gavin’s divisions using economists’ estimates of next-period GDP growth and sums the three estimates to forecast Gavin’s sales. Epworth’s approach to estimating Gavin’s sales is:

A) appropriate.

B) inappropriate, because sales should be forecast on a firm-wide basis and are unlikely to be related to GDP growth.

C) inappropriate, because sales should be forecast on a firm-wide basis.

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Sales estimates can be more sophisticated than simply estimating a single growth rate. One common approach is to estimate the linear relationship between sales growth and economic growth and use this relationship to estimate sales growth based on economists’ forecasts of GDP growth. Segment-by-segment analysis can also be applied, summing segment or division sales forecasts to produce an overall sales forecast for the firm.