Association for Financial Professionals (AFP) 2025 – 400 Free Practice Questions to Pass the Exam

The percentage-of-sales method of cash forecasting relies heavily on the relationship between sales and cash flows. Specifically, it emphasizes how forecasted income statement values, such as revenue and expenses, impact the overall cash position of a company. This approach allows financial professionals to estimate cash inflows and outflows based on projected sales levels, which directly affect cash collections and expenses.

When you determine how forecasted income statement and balance sheet values impact cash, you’re effectively understanding the dynamic between revenues generated from sales and the cash flow cycle—highlighting how sales volume translates to cash for the business. This information is critical for calculating the ending cash balance, since it informs both expected cash inflows from collections and outflows for operational costs, ensuring that forecasts remain aligned with the realities of financial performance.

The other options, while they touch upon relevant aspects of cash forecasting, do not directly address the core requirement of linking sales to cash outcomes as fundamentally as determining the effects of forecasted income statement and balance sheet figures does. This link is essential for successfully grasping cash movement and predicting future cash availability.