Question

A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?

A. 32%

B. 13%

C. 8%

D. Not enough information to determine

Answer 1

Answer choice D is correct: Not enough information to determine. We cannot calculate the required growth in current liabilities without knowing their initial percentage relative to sales.

Step-by-step explanation:

Under the percent-of-sales forecasting method, we typically assume that the current assets and liabilities will grow proportionally with sales. Last year's cash, accounts receivable, and inventory percentages amounted to a combined 65% of sales (10% + 30% + 25%). If sales are expected to grow by 20%, the same 65% will represent a larger absolute number after accounting for the 20% growth. However, to determine the percentage growth in current liabilities required to support the growth in sales, we need specific information about the current liabilities' percentage relative to sales last year.

We do not have enough information to determine the percentage growth in current liabilities, as the question does not provide the initial figure or percentage of current liabilities relative to sales.

Answer choice D is correct: Not enough information to determine.