Reference no: EM133971538

Question

The principal driver in creating a budgeted income statement sometimes referred to as a pro forma statement, is the sales forecast as discussed above. A projected increase in sales will require additional assets. Those assets (i.e., increase in accounts on the left-hand side of the balance sheet) must be paid for with corresponding increases in liabilities and equity (i.e., increases in accounts on the right-hand side of the balance sheet). The percent of sales method is most often used to forecast future asset, liability accounts, and equity (this assumes that the growth of all accounting elements follows the same trend line). For this process, the direct financing accounts on the right-hand side of the balance sheet (in particular, notes payable, long-term debt, preferred stock, and common equity are kept constant). The resulting difference between projected total assets and projected total liabilities and equity is the company's future need for external funding. The growth rate in sales that results in the future need being zero is called the organizations' sustainable growth rate.