$5.$ Using regression analysis to forecast assets

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.

Mainway Toys Co$.$ has used its historical sales and asset data to estimate the following regression equations:

Accounts Receivable $=$$$99,220+0\mathrm{.}225($Sales$)$

Inventories $=$ $$10,120+0\mathrm{.}243($Sales$)$

Mainway Toys Co$.$ currently has sales of $$922,000,$ but it expects sales to grow by $10\%$ over the next year. Use the regression models to calculate Mainway Toys Co$.$s forecasted values for accounts receivable and inventories needed to support next year$$s sales.

Forecasted Values for Next Year

Accounts receivable

Inventories

Based on the next year$$s accounts receivable and inventory levels predicted by Mainway Toys Co$.$s regression equations, the firm$$s DSO for next year is expected to be $.$ Use $365$ days as the length of a year in all calculations.