How are working capital items forecasted? Why are accounts receivable typically forecasted as a percentage of...

How are working capital items forecasted? Why are accounts receivable typically forecasted as a percentage of revenue and accounts payable, and inventories as percentages of the cost of goods sold? Explain.

Expert Solution

Working capital refers to the capital required by a business for meeting its day to day needs. This is calculated as the difference between current assets and current liabilities. Working capital can be forecasted by a number of methods such as cash forecasting method, percentage of sales method, adjusted profit and loss method, balance sheet method and operating cycle method.

Accounts receivable is forecasted as a percentage of sales since it is based upon the sales figure of the business. The receivables correlate to the sales revenues and change with the change in the revenues. Accounts payable on the other hand are expressed as a percentage of cost of goods sold since the amount is payable on the amount of goods purchased. The payables vary according to the cost of goods sold. Inventories are in the same manner expressed as a percentage of cost of goods sold since they are dependent on the cost price and not the selling price.

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