Western Governors University (WGU) ACCT2020 D196 Principles of Financial and Managerial Accounting Practice Test

The percent of sales method is commonly used for determining a company's discretionary financial needs (DFN) because it establishes a direct relationship between sales and the various components of working capital and financing requirements. By analyzing historical data, businesses can predict how changes in sales will impact their need for additional resources, such as inventory, accounts receivable, and accounts payable.

This approach simplifies forecasting by applying a fixed percentage to projected sales figures, reflecting the assumption that certain costs and financial needs will naturally scale with sales volume. For example, if a company anticipates a 10% increase in sales, it can estimate that its need for inventory might also increase by the same percentage, allowing for more straightforward financial planning and budgeting.

Other methods like weighted average cost of capital, regression analysis, and cash flow analysis can provide insights into different aspects of financial management, but they do not specifically focus on the direct link between sales and discretionary financial needs in the same straightforward manner as the percent of sales method does. This makes the percent of sales method particularly popular among financial managers aiming to quickly assess and respond to changes in sales and associated funding requirements.