6. Using regression analysis to forecast assets Aa Aa The AFN equation and the f
ID: 2796791 • Letter: 6
Question
6. Using regression analysis to forecast assets Aa Aa 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. U.S. Robotics Inc. has used its historical sales and asset data to estimate the following regression equations: Accounts Receivable$95,420 0.265(Sales) Inventories $9,340+0.243(Sales) = U.S. Robotics Inc. currently has sales of $1,110,000, but it expects sales to grow by 30% over the next year. Use the regression models to calculate U.S. Robotics Inc.'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 U.S. Robotics Inc.'s regression equations, the firm's DSO for next year is expected to be calculations . Use 365 days as the length of a year in allExplanation / Answer
Accounts Receivables = -$95420 + 0.265*(Sales)
Inventories = $9,340 + 0.243*(Sales)
Current Sales = $1,110,000. Expected growth next year = 30%
Sales next year = (1,110,000) * (1.30) = $1,443,000
Based on the regression equation for inventories and accounts receivables, substituting for sales values gives:
Accounts Receivables = -$95420 + 0.265*(1,443,000) = $286,975
Inventories = $9,340 + 0.243*($1,443,000) = $359,989
The corresponding values for the current period:
Accounts Receivables = -$95420 + 0.265*(1,110,000) = $198,730
Inventories = $9,340 + 0.243*($1,110,000) = $279,070
DSO for next year = [(Average accounts receivables) / Total Sales ] * 365
Average accounts receivable for the next period = (198,730 + 286,975) / 2 = $242,852.50
DSO = [(242,852.50) / (1,443,000)] * 365
= 61.428 = ~ 61.43 days
Please Note that here we have used average receivables value insted of using Accounts Receivables for the particular period. This is because the balance sheet numbers are at a single point in time and hence needs to be averaged out. You may also try with the receivables for the particular period. But the recommended approach is to average out the receivables.
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