The question has us creating a pro forma balance sheet, and one of the criteria

Question

The question has us creating a pro forma balance sheet, and one of the criteria is:

(5) The firms ending inventory will change directly with the changes in sales in 2016.

Does that mean the inventory will (A) decrease by the the amount the sales increased, or (B) will the initail inventory be greater, therefore the amount of inventory will be increased by the same percentage the sales increased.

So, since sales changed from $800,000 to $900,000, and the inventory was $100,000, is it now (A) $0 or (B) $112,500?

Explanation / Answer

In normal firm operations if inventory decrease by the amount sales have increased this is going to be unsustainable in the long term as firm will not have any inventory left for future sales. Thus option (b) for both questions is correct.

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