Balance Sheet Projections

Question 1

Working Capital

• Definition
• Formula

Answer 1

Definition: working capital is a measure of a company’s short-term financial health

Formula: Acc Receivables + Inventory - Acc. Payables (all of Operating Activity)

Question 2

WS: Accounts receivables (AR) projections

Answer 2

• Grow with sales (net revenues).
• Using an IF statement, model should enable users to override with days sales outstanding (DSO) projection, where days sales outstanding (DSO) = (AR / Credit Sales) x days in period.

Question 3

WC: Inventories - projections

Answer 3

• Grow with cost of goods sold (COGS).
• Override with inventory turnover (Inventory turnover = COGS / Average inventory).

Question 4

WC: Prepaid expenses - Definition & projections

Answer 4

Definition: Pre-payments for utilities, rents,… - until used in BS, then in IS

Projections:
- If prepaid expenses comprise expenses predominantly classified as SG&A, grow with SG&A.

• If you aren’t sure, grow with revenue.

Question 5

WC: Other Current Assets - projections

Answer 5

• Grow with revenues (presumably these are tied to operations and grow as the business grows).
• If there’s reason to believe they are not tied to operations, straight-line the projections.

Question 6

WC: Accounts payable - Projections

Answer 6

• If the payables are generated predominantly for inventory, grow with COGS.
• If you aren’t sure, grow with revenue.
  Override with payables payment period assumption.

Question 7

WC: Accrued Expenses - Def. & projections

Answer 7

Definition: Wages and other expenses already recognized but not paid out

Projections:
- If the accrued expenses are largely for expenses that will be classified as SG&A, grow with SG&A.

• If you aren’t sure, grow with revenue.

Question 8

WC: Deferred revenue - definition and projections

Answer 8

Refers to sales that cannot be recognized as revenue yet.
Examples include gift cards and software for which upfront payment implies rights to future upgrades.

Grow with the revenue growth rate.

Question 9

WC: Taxes Payable - Definition & projections

Answer 9

Definition: Taxes due but still unpaid

Grow with the growth rate in tax expense on the income statement.

Question 10

WC: Taxes Payable - projections

Answer 10

Grow with the growth rate in tax expense on the income statement.

Question 11

WC: Other current liabilities - projections

Answer 11

• Grow with revenues.
• If there’s reason to believe they are not tied to operations, straight-line the projections.

Question 12

Balance sheet Positions - Assets

Answer 12

Current Assets (1 year or less):
- Accounts receivables (Money owned by third parties)
- Inventories (Base Materials)
- Cash (Bank Account and liquid assets that can be converted into cash)

Non-current Assets (more than 1 year):
- Property, Plant & Equipment (Buildings, Machinery & Equipment)
- Long termin Investments
- Intantigble assets
- Goodwill

Question 13

Balance Sheet Positions: Liabilities & Equity

Answer 13

Liabilities:
- Accounts Payables (Liabilities against third parties for buying stuff)
- Current Liabilites (Other Liabilities e.g. Loans due in less than 1 year)
- Deferred revenue
- Non-Current Liabilities (Obligations due >1 Year - e.g. mortages, bank loans)

Equity:
- Shareholder Equity: Money investend in the company by owners
- Retained earnings: Accumulated portion of net income retained by the company and not distributed to shareholders - Prior retained earnings+net income- dividends
- Treasury stock - Stock bought back by the company
- Preferred stock - Separate class of equity for special investors
- Common stock - Class of equity representing ownership in a company
- Additional paid- in capital - Amount invested in excess of common stock