Which of the following is not a step in the Percent of Sales forecasting method?

Question

BlackTom AI · Accepted Answer

To approach this question, I will evaluate what each option represents in the context of the Percent of Sales forecasting method, which is a common simplification used in financial forecasting.
Option 1: 'Calculate Retained Earnings' — In many percent-of-sales forecasting frameworks, after projecting net income, you do consider how much of that income is retained versus paid as dividends to determine the new retained earnings balance. This helps in understanding internal financing and potential needs for external financing, so this step can be part of the process.
Option 2: 'Project sales revenues and expenses' — This is central to the method. The core idea of percent-of-sales forecasting is to project sales, and then express various expense and asset/liability items as a percentage of sales to derive the pro forma numbers. Therefore, this is definitely a step in the method.
Option 3: 'Deal with discretionary accounts' — Discretionary accounts are those costs that are not tightly tied to sales and may be controlled or adjusted by management. In a strict percent-of-sales forecast, most discretionary or non-spontaneous items are either held constant or treated separately, but the method still often addresses some discretionary adjustments. It’s not inherently excluded, though it may be treated differently from spontaneous items. This option is ambiguous and less characteristic of the basic, direct steps of the method.
Option 4: 'Calculate SGR' — SGR stands for Sustainable Growth Rate, which is a concept used to determine growth achievable with internal financing given retention and profitability. It is not a direct step in producing a pro forma forecast using the percent-of-sales method. SGR is more about planning and evaluating financing constraints rather than generating the forecast itself.
Taken together, the item that does not belong as a step in the Percent of Sales forecasting method is calculating the Sustainable Growth Rate, since SGR is a financing/growth-constrained metric rather than a procedural step in building the forecast. The other options align more closely with constructing pro forma figures from sales percentages, even if some require interpretation within the broader planning context.

MSB-250-300-002 Proctored Final Exam

Which of the following is not a step in the Percent of Sales forecasting method?

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