Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory.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 inventory in the current year is $5,890,200.What is the projection for next year's inventory?

Question

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The percent of sales method involves projecting next year's inventory based on the expected increase in sales. The current year's cost of goods sold (COGS) is $17,528,000 out of sales of $27,800,000. With sales expected to rise by 30%, next year's sales would be $27,800,000 * 1.30 = $36,140,000. Assuming the relationship between sales and inventory remains constant, the projection for next year's inventory would be calculated as follows: Current inventory is $5,890,200, which supports current sales of $27,800,000. To support $36,140,000 in sales, the inventory would need to increase proportionally. The ratio of current inventory to current sales is $5,890,200 / $27,800,000. To find the projected inventory, multiply the projected sales by this ratio: $36,140,000 * ($5,890,200 / $27,800,000) = $7,657,260.

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