Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

-Banner's projected current assets for 2005 are:
A)$1,000,000.
B)$1,120,000.
C)$1,500,000.
D)$1,260,000.

Question

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )
 
-Banner's projected current assets for 2005 are:
A)$1,000,000. 
B)$1,120,000. 
C)$1,500,000. 
D)$1,260,000.

Quizplus · Accepted Answer

Using the percent-of-sales method, we can forecast the current assets by multiplying the projected sales by the percentage of current assets to sales from the balance sheet. 
Current assets as a percentage of sales = $350,000 / $1,600,000 = 0.21875 or 21.875%
Projected current assets for 2005 = $2,000,000 x 21.875% = $437,500
We also need to add the amount of cash that will be used for dividends, which is $90,000.
Projected current assets for 2005 = $437,500 + $90,000 = $527,500
Therefore, the best choice is B, which is $1,120,000 when rounded to the nearest thousand.

Use the Following Information and the Percent-Of-Sales Method to Answer