Forecast Revenues And Expenses
Help Questions
CPA Business Analysis and Reporting (BAR) › Forecast Revenues And Expenses
The percentage-of-sales method for forecasting financial statements is based on which assumption?
CVP analysis separates fixed and variable components before any forecasting is performed
Many income statement and balance sheet items vary proportionally with revenue, so each is expressed as a fixed percentage of sales to project future values
Future expenses are estimated by multiplying prior-year expenses by the expected revenue growth rate
All expenses remain constant in total as revenue changes, so only revenue needs to be forecasted
Explanation
The percentage-of-sales method assumes that items such as COGS, operating expenses, accounts receivable, inventory, and accounts payable maintain a stable relationship to revenue over time. By expressing each as a percentage of historical sales, the analyst can project future values simply by applying those percentages to forecasted revenue. Option B describes fixed cost behavior, the opposite of the variable relationship assumed. Option C describes applying a growth rate to expenses, which is different from expressing them as a revenue percentage. Option D describes a different analytical method used for cost structure analysis.
A company had revenue of $5,000,000 last year. Management forecasts 12% revenue growth for the coming year. What is the forecasted revenue?
$5,600,000
$5,500,000
$5,060,000
$5,800,000
Explanation
Forecasted revenue = Prior revenue x (1 + growth rate) = $5,000,000 x 1.12 = $5,600,000. Option A applies a 10% growth rate. Option C applies a 1.2% growth rate. Option D applies a 16% growth rate.
Using the percentage-of-sales method with COGS historically at 62% of revenue and SGA at 18% of revenue, what are the forecasted COGS and SGA for projected revenue of $5,600,000?
COGS $3,472,000; SGA $1,008,000
COGS $3,100,000; SGA $1,080,000
COGS $3,584,000; SGA $1,120,000
COGS $3,360,000; SGA $900,000
Explanation
COGS = $5,600,000 x 62% = $3,472,000. SGA = $5,600,000 x 18% = $1,008,000. Option A applies 62% and 19.3% respectively. Option B applies 60% and 16.1% respectively. Option D applies 64% and 20% respectively - the percentages from a prior period rather than the stated historical averages.
A company's revenue for three consecutive years was $4,200,000, $4,620,000, and $5,082,000, growing at a consistent 10% annually. Using this trend, what is the Year 4 revenue forecast?
$5,500,000
$5,400,000
$5,082,000
$5,590,200
Explanation
Year 4 forecast = Year 3 revenue x (1 + trend growth rate) = $5,082,000 x 1.10 = $5,590,200. Option A repeats Year 3 revenue without applying growth. Option B applies approximately 6.3% growth. Option C applies approximately 8.2% growth, not the consistent 10% trend.
The total addressable market is estimated at $800,000,000. A company expects to maintain its current 4.5% market share. Using the top-down approach, what is forecasted revenue?
$28,000,000
$36,000,000
$40,000,000
$32,000,000
Explanation
Forecasted revenue = Total market x Market share = $800,000,000 x 4.5% = $36,000,000. Option A applies a 5.0% market share. Option B applies a 4.0% market share. Option D applies a 3.5% market share.
A company forecasts expenses as: variable manufacturing 45% of revenue, variable selling 6% of revenue, fixed overhead $800,000, fixed SGA $1,200,000. Forecasted revenue is $8,000,000. What are total forecasted expenses?
$6,080,000
$5,680,000
$5,280,000
$6,480,000
Explanation
Total variable costs = (45% + 6%) x $8,000,000 = 51% x $8,000,000 = $4,080,000. Total fixed costs = $800,000 + $1,200,000 = $2,000,000. Total expenses = $4,080,000 + $2,000,000 = $6,080,000. Option A omits fixed overhead. Option B applies a higher variable percentage. Option C uses only one fixed cost component.
Using the expense forecast from the prior question (variable costs 51% of revenue, fixed costs $2,000,000) with revenue of $8,000,000, what is forecasted operating income?
$2,720,000
$1,120,000
$1,920,000
$3,920,000
Explanation
Contribution margin = $8,000,000 x (1 - 0.51) = $8,000,000 x 0.49 = $3,920,000. Operating income = $3,920,000 - $2,000,000 = $1,920,000. Option B omits variable selling expenses from the variable cost ratio. Option C uses an incorrect fixed cost total. Option D reports contribution margin before fixed costs rather than operating income.
A company forecasts: 15% revenue growth from last year's $6,000,000; COGS remaining at 58% of revenue; SGA increasing by $200,000 from last year's $900,000; depreciation unchanged at $300,000. What is forecasted operating income?
$1,398,000
$1,698,000
$1,498,000
$1,598,000
Explanation
Forecasted revenue = $6,000,000 x 1.15 = $6,900,000. COGS = $6,900,000 x 58% = $4,002,000. Gross profit = $6,900,000 - $4,002,000 = $2,898,000. SGA = $900,000 + $200,000 = $1,100,000. Operating income = $2,898,000 - $1,100,000 - $300,000 = $1,498,000. Option A uses an incorrect COGS percentage. Option C omits the SGA increase. Option D applies SGA as a percentage of new revenue rather than adding the fixed increment.
A company projects revenue of $9,000,000 and targets days sales outstanding (DSO) of 40 days. What is the forecasted accounts receivable balance?
$986,301
$900,000
$225,000
$1,200,000
Explanation
Forecasted AR = Revenue x (DSO / 365) = $9,000,000 x (40 / 365) = $9,000,000 x 0.10959 = $986,301. Option A uses an incorrect divisor. Option B uses a 48.7-day DSO. Option C uses a round 36.5-day DSO instead of 40 days.
Using the same annual forecast of $12,000,000 and a Q1 seasonal index of 0.85, what is the forecasted Q1 revenue?
$3,000,000
$3,300,000
$2,400,000
$2,550,000
Explanation
Q1 forecast = ($12,000,000 / 4) x 0.85 = $3,000,000 x 0.85 = $2,550,000. Q1 is a below-average quarter at 85% of the quarterly base. Option A is the unadjusted base quarterly amount. Option B applies a 1.10 index (Q2 index). Option D applies a 0.80 index (Q4 index).