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    Forecasting inventories & end-of-year retained earnings

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    1) Suppose forecasted sales are $26,117 and the gross profit margin is expected to be 35.00 percent. If the forecasted ratio of inventories to cost of sales is 20.00 percent, compute the forecasted inventories balance for the pro forma financial statements.

    2) Suppose beginning-of-year retained earnings are $7,767 and net income is forecasted to be $2,341 for the coming year. If the dividend payout ratio is expected to be 25.00 percent, compute forecasted end-of-year retained earnings.

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    Solution Preview

    1. Sales are 26,117. Gross Margin at 35%=26117*35%=9140.95. Gross Margin=sales-Cost of Goods Sold ( or cost of sales).
    Cost of Goods Sold(Cost of sales)=Sales - Gross Margin

    Solution Summary

    The solution explains how to calculate the year end inventory balance and the balance in retained earnings