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Learning Objectives

Learning Objectives. Explain why financial forecasting is essential for the healthy growth of the firm. (LO 1 ) Prepare the four financial statements for forecasting. (LO 2 ) The pro forma income statement The pro forma statement of retained earnings The cash budget

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Learning Objectives

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  1. Learning Objectives Explain why financial forecasting is essential for the healthy growth of the firm. (LO1) Prepare the four financial statements for forecasting. (LO2) The pro forma income statement The pro forma statement of retained earnings The cash budget The pro forma balance sheet Perform the specific accounts method and the percent-of-sales method for forecasting on a less precise basis. (LO3)

  2. LO3 Pro Forma Income Statement • Provides a projection of how much profit the firm anticipates making over the ensuing time period • Involves the following 4 steps: • establishing a sales projection • determining a production (or purchase) schedule and the associated use of new material, direct labor and overhead to arrive at gross profit • computing other expenses • determining the profit

  3. Basis for Sales Projections External Factors Recession or boom? Export sales? Consumer spending? Competition? New technology? etc. Internal Factors New product lines? Turnover in people? Profit targets? Employee training? Price changes? etc. LO3

  4. LO3 Table 4-1 Projected wheel and caster sales (first six months, 2012)

  5. LO3 Table 4-2 Stock of beginning inventory

  6. LO3 Production (or Purchases) Schedule Projected sales (in Units or $) PLUS Desired ending inventory MINUS Beginning inventory EQUALS Production (or Purchases)

  7. LO3 Table 4-3 Productionrequirements for sixmonths

  8. LO3 Table 4-4 Unit costs

  9. LO3 Table 4-5 Total production costs

  10. LO3 Table 4-6 Allocation of manufacturing costand determination of gross profits

  11. LO3 Table 4-7 Value of endinginventory

  12. LO3 Pro Forma Balance Sheet • Shows the anticipated cumulative changes in a firm’s asset holdings and liabilities and equity account over the next time period • Is constructed from the prior period’s balance sheet and pro forma income statement and the cash budget

  13. LO3 Figure 4-2 Development of a pro formabalance sheet

  14. LO3 Table 4-17Pro Forma Balance Sheet (ASPE format) Pro Forma Balance Sheet June 30, 2013 Assets Current assets: 1. Cash . . . . . . . . . . . . $ 5,000 2. Marketable securities . . . . . . . 3,200 3. Accounts receivable. . . . . . . . 16,000 4. Inventory . . . . . . . . . . . 6,200 Total current assets . . . . . . 30,400 5. Plant and equipment . . . . . . . 45,740 Total assets . . . . . . . . . . . $76,140 Liabilities and Shareholders' Equity 6. Accounts payable . . . . . . . . $ 5,732 7. Notes payable . . . . . . . . . 5,884 8. Long-term debt . . . . . . . . . 15,000 9. Common stock . . . . . . . . . 10,500 10. Retained earnings . . . . . . . . 39,024 Total liabilities and shareholders' equity . . $76,140

  15. LO3 Percent-of-Sales Method • A short-cut, less exact, easier method of determining financing needs (The “quick and dirty” approach) • Assumes that B/S accounts will maintain a constant percentage relationship to sales • More sales will mean more assets which will require more financing • Can be summarized by using the Required New Funding formula

  16. LO3 Table 4-18 Percent –of-sales table

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