Question

Briefly describe how analysts typically forecast each of the following items: Sales, Cost of Sales, Inventory, and Tax expense.

Answer 1

Description on Forecasting

1) Sales - Sales are forecasted by taking prior year sales value as base value increased by sales growth rate for required year

Growth rate is determined by using past trends analysis and Industry average.

2) Cost of sales - Usually cost of sales is determined as percentage of sales for prior year and same rate is applied to calculate forecasted cost of sales for required year.

Due consideration is given to variable and fixed cost of sales for forecasting

3) Inventory - Inventory is determined as percentage of sales at a constant rate. Industry analysis, Inventory turnover ratio are also taken into account while forecasting

4) Tax expense - First tax rate is determined for prior year. Tax rate is determined by using formula -

Tax rate = (Tax expense/Pretax Income)*100

Then this tax rate is applied to calculate forecasted tax expenses. Due consideration is also given tax rate changes in future, Tax provisions, Growth prospect and effective tax planning