If sales fall, then the percent-of-sales method may overstate profits if fixed costs do not decline by the same amount of the sales decline.
The percent of sales method is a convenient but flawed process of financial forecasting. In the previous illustration, the company reports $160,000 as the total of its accounts receivable at the end of Year Two. A separate subsidiary ledger should be in place to monitor the amounts owed by Percentage of Sales Method each customer (Mr. A, Ms. B, and so on). The general ledger figure is used whenever financial statements are to be produced.
An unexpected result is that profit margin also plays a role in determining the profit forecast error. A table showing forecast errors for a range of the main variables causing the errors is included. The percentage of sales method is a forecasting model that makes financial predictions based on sales. Financial statement items like the cost of goods sold and accounts receivable are represented as a percentage of sales. The percentage of sales method links sales data to company balance sheets and income accounts.
Learn more about percentage of sales here
https://brainly.com/question/1811849
#SPJ4
