A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?
A) 32%
B) 13%
C) 8%
D) Not enough information to tell

Question

Quizplus · Accepted Answer

Under the percent-of-sales method, the growth in current liabilities should match the growth in current assets to support the sales growth. The total current assets as a percentage of sales is 65% (10% cash + 30% accounts receivable + 25% inventory). With a 20% sales growth, the required increase in current liabilities is 20% of 65%, which is 13%.

A Firm Has Targeted a 20% Growth in Sales This