Question

Which of the below assumptions is necessary when using the constant growth (percentage of sales) method of forecasting financial statements? Group of answer choices

a. Most income statement items and balance sheet accounts are tied directly to revenues.
b. All reimbursements are by the fee-for-service method.

Answer 1

In the constant growth forecasting method, the key assumption is that income statement and balance sheet entries correlate directly with revenues, enabling the application of a sales growth rate to forecast financials.

Step-by-step explanation:

The correct assumption necessary when using the constant growth (percentage of sales) method of forecasting financial statements is that most income statement items and balance sheet accounts are tied directly to revenues. This assumption is fundamental because it allows for the straightforward application of a constant growth rate to project future financial statements based on the sales growth rate. Factors such as the overall economy's growth rates, reaction to changes in income or price, and budget constraint frameworks often play significant roles in understanding how the growth methods apply in real-world scenarios.