Question

Which of the following statements is CORRECT?

	a.	The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
	b.	The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
	c.	Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
	d.	Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
	e.	The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.

Answer 1

The correct answer is (a). The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. When the management will be aware of the sales forecast, then only it will be able to estimate the financial requirement of different resources in an effective manner. The sales forecast is dependent on various kind of factors like the demand of the product in the market, nature of product, cost etc.once the demand and actual production that needs to be done is established, further steps are taken to assess the financial requirements of the company.