Question

The AFN equation and the financial statement–forecasting approach both assume that assets grow at relatively the same rate as sales. However, the relationship between assets and sales is often a little more difficult than that. In particular, some firms use regression analysis to predict the required assets needed to support a given level of sales.

Mainway Toys Co. has used its historical sales and asset data to estimate the following regression equations:

Accounts Receivable	=	–$95,420 + 0.225(Sales)
Inventories	=	$9,110 + 0.192(Sales)

Mainway Toys Co. currently has sales of $984,000, but it expects sales to grow by 30% over the next year. Use the regression models to calculate Mainway Toys Co.’s forecasted values for accounts receivable and inventories needed to support next year’s sales.

Forecasted values for next year:

accounts receivable_______

inventories__________

Based on the next year’s accounts receivable and inventory levels predicted by Mainway Toys Co.’s regression equations, the firm’s DSO for next year is expected to be ____ . Use 365 days as the length of a year in all calculations.

Answer 1

Answer a.

Current Year:

Sales = $984,000

Next Year:

Sales = $984,000 + 30% * $984,000
Sales = $1,279,200

Accounts Receivable = -$95,420 + 0.225 * $1,279,200
Accounts Receivable = $192,400

Inventories = $9,110 + 0.192 * $1,279,200
Inventories = $254,716.40

Answer b.

Days Sales Outstanding = 365 * Accounts Receivable / Sales
Days Sales Outstanding = 365 * $192,400 / $1,279,200
Days Sales Outstanding = 54.90 days

Based on the next year’s accounts receivable and inventory levels predicted by Mainway Toys Co.’s regression equations, the firm’s DSO for next year is expected to be 54.90 days.