Answered: The AFN equation and the financial…

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter7: Operating Assets

Section: Chapter Questions

Problem 12MCQ: Which of the following statements is true? a. The fixed asset turnover ratio assists managers in...

See similar textbooks

Related questions

Question

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.

Leeding Engines Ltd. has used its historical sales and asset data to estimate the following regression equations:

Accounts Receivable	=	–$94,555 + 0.249(Sales)
Inventories	=	$9,900 + 0.180(Sales)

Leeding Engines Ltd. currently has sales of $1,230,000, but it expects sales to grow by 15% over the next year. Use the regression models to calculate Leeding Engines Ltd.’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 Leeding Engines Ltd.’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.

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.
Leeding Engines Ltd. has used its historical sales and asset data to estimate the following regression equations:
Accounts Receivable
Inventories
-$94,555 +0.249(Sales)
$9,900+ 0.180(Sales)
Leeding Engines Ltd. currently has sales of $1,230,000, but it expects sales to grow by 15% over the next year. Use the regression models to calculati
Leeding Engines Ltd.'s forecasted values for accounts receivable and inventories needed to support next year's sales.
Forecasted Values for Next Year
Accounts receivable
Inventories
Leeding Engines Ltd. currently has sales
Leeding Engines Ltd.'s forecasted values
Forecasted Values for Next Year
Accounts receivable
Forecasted Values for Next Year
Accounts receivable
Inventories
Leeding Engines Ltd. currently has sales $251,285 0, but it expects sales to grow by 15% over the next year. Use the regression models to calculate
Leeding Engines Ltd.'s forecasted values
receivable and inventories needed to support next year's sales.
53.19 days
Forecasted Values
Accounts receivable 49.87 days
Inventories
56.52 days
66.49 days
Based on the next yea
year is expected to be
$244,773
0, but it expects sales to grow by 15% over the next year. Use the regression models to calculate
$283,422 receivable and inventories needed to support next year's sales.
$257,656
$270,539
$224,834
$238,059
$264,510
eceivable and inventory levels predicted by Leeding Engines Ltd.'s regression equations, the firm's DSO for next
. Use 365 days as the length of a year in all calculations.

Expert Solution

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions