Which of the following statements is CORRECT?
A) The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
B) Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated.
C) The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets.
D) The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.
E) Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

Question

Quizplus · Accepted Answer

Forecasting future sales is the first step in forecasting financial requirements because it provides the basis for estimating other financial variables, such as expenses and capital expenditures. The other statements are incorrect. Forecasted financial statements are used for a variety of purposes, not just as a part of managerial compensation programs. The capital intensity ratio is used to measure how much fixed assets a company has in relation to its sales, not the physical condition of those assets. The AFN equation and the forecasted financial statement method are two approaches to forecasting financial requirements, and the AFN equation is not necessarily more accurate than the forecasted financial statement method; the choice of which method to use depends on the specifics of the company and the forecasting problem. Finally, while determining the breakdown of common equity between common stock and retained earnings is important, it is not necessarily the most important step in developing forecasted financial statements.

Which of the Following Statements Is CORRECT