Which of the following is NOT a step in the financial forecasting process when using the percent of sales method?

Question

BlackTom AI · Accepted Answer

Question restatement: Which of the following is NOT a step in the financial forecasting process when using the percent of sales method?

Option 1: Project sales revenues and expenses. This is a core part of the percent of sales method, since future revenues and costs are driven by projected sales and the method uses these targets to build the forecast. Therefore, this option describes a valid step.

Option 2: Deal with discretionary accounts. In forecasting, discretionary (or non-spontaneous) accounts must be analyzed and sometimes adjusted to account for financing needs and strategic decisions. Handling discretionary items is part of forming a complete forecast, so this is a legitimate step.

Option 3: Calculate retained earnings. Retained earnings are tied to net income and the payout/retention policy, which feeds into equity and the sustainable financing picture. Computing retained earnings is typically included in the forecasting process, making this a valid step.

Option 4: Determine the sustainable growth rate. The sustainable growth rate (SGR) is a metric that expresses how fast the firm can grow using internal financing while keeping leverage and payout policies constant. It is a concept or outcome derived from the forecast rather than a procedural step in building the forecast itself. This is the element that is not a direct step in the percent of sales forecasting process.

Option 5: Forecast change in spontaneous balance sheet accounts. Spontaneous accounts (such as accounts receivable, accounts payable, and other naturally changing items) are explicitly forecast under the percent of sales approach, so this is indeed a step.

Summary: The options that describe actual steps in building the forecast include projecting sales and expenses, handling discretionary items, calculating retained earnings, and forecasting spontaneous balance sheet changes. The sustainable growth rate is a derived metric, not a forecasting step, which makes Option 4 the correct choice. (Note: The specific correct option per the provided data is: 'Determine the sustainable growth rate.')

Which of the following is NOT a step in the financial forecasting process when using the percent of sales method?Single choice

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