Use the "Percent of Sales Method" of Preparing Pro Forma

question 48

Multiple Choice

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in accounts payable in the current year is $2,218,500.What is the projection for next year's accounts payable?

• A) $2,127,000
• B) $3,781,750
• C) $2,884,050
• D) $4,184,000

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Definitions:

Thin Capitalization

A financial situation in which a company has a high level of debt compared to its equity.

Debt-to-Equity Ratio

A financial metric that shows the comparative ratio of debt to shareholders' equity utilized to fund a company's assets.

Subsidiary Company

A company that is completely or partially owned and wholly controlled by another company, known as the parent company.

Corporation Law

The body of law that governs the formation, operation, and dissolution of corporations, including their rights and obligations.