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Forecasting with the Percentage of Sales approach to creating Pro Form Statements is a commonly used...

Forecasting with the Percentage of Sales approach to creating Pro Form Statements is a commonly used technique. What is an example of a spontaneously changing (an item which varies with sales) account when using the Percentage of Sales approach?

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Answer #1

Financial forecasting helps to predict which of the asset account will increase and by how much. Spontaneous accounts are accounts are those accounts that vary with the level of sales. As the sales increases or decreases, the company’s asset base will have to expand or contract to support the new sales.

Accounts that vary with the level of sales are current accounts like cash, inventory and accounts receivable and accounts payable. An increase in sales would increase these accounts. When sales increase, accounts payable will also increase to buy more material to produce more products.

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