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...

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.

General Services Corp. has used its historical sales and asset data to estimate the following regression equations:

General Services Corp. currently has sales of $900,000, but it expects sales to grow by 30% over the next year. Use the regression models to calculate General Services Corp.’s forecasted values for accounts receivable and inventories needed to support next year’s sales.