Chapter 4: Financial Forecasting need finish Flashcards
Types of Pro Forma Statements
Pro forma income statement (based on sales/production plan)
Cash budget (translate material)
Pro forma balance sheet
What are pro forma financial stmts?
enable a firm to estimate future receivables, inventory, and payables, as well as anticipated profits and borrowing requirements.
Statements are often required by bankers, other lenders as guide for the future.
How to establish stmts
- Construct income statement based on sales projections and the production plan.
- Translate this into a cash budget.
- Assimilate all materials into pro forma balance sheet.
How to construct pro forma Income Statement
- Establish a sales projection
- Determine production schedule and associate new material, direct labor, and overhead to arrive at gross profit
- Compute other expenses: EBT, Aftertax income, Contribution to RE
- Determine profit by completing the actual pro forma stmt
Production requirements =
Projected sales + Desired ending inventory - Beginning Inventory
COGS uses (LIFO or FIFO)
LIFO accounting
Cash Budget
a. Find Cash Receipts (Inflows) - Sales / Collections
b. Find Cash Payments (outflows) -
Manufacturing (materials, labor, overhead), gen/admin, interest, tax, dividends, P&E
c. Actual budget - Net cash flow, loans, end cash balance (min)
Pro Forma Balance Sheet Components Needed
Prior balance sheet: Marketable securities, long term debt, common stock
Pro Forma Income: Inventory, RE
Cash Budget Analysis: Cash, A/R, P/E, A/P, N/P
What is the Percentage of Sales Method
A method of determining future financial needs that is an alternative to the development of pro forma financial statements. We first determine the percentage relationship of various asset and liability accounts to sales, and then we show how that relationship changes as our volume of sales changes.
no % for NP, Common Stock, or RE
Establishing funds required to finance growth (equation)
RNF = (Assets/Sales % * Change in Sales) - (Liabilities/Sales % * Change in sales) - Profit Margin*New Sales level * ( 1 - Dividend payout ratio)
A rapid rate of growth in sales may require
increased borrowing by the firm to support the sales increase.
A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO?
Ending Inventory = 300 units @ $12 each = $3,600
What belongs in the cash budget analysis? What does not belong:
A/R
P & E
Notes Payable - NP
Not: inventory
If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be cumulative amount of loan at the end of January?
Net outflow $ (6,500)
Beginning cash balance $ 16,000
Cumulative cash balance $ 9,500
Answer = 0 in loans
When developing a pro forma income statement, in what order are the steps typically completed?
- Determine profit by completing the actual pro forma statement?
- Compute other expenses.
- Establish a sales projection.
- Determine a production schedule and the associated use of new material, direct labor, and overhead to arrive at gross profit.
3,4,2,1
In order to estimate production requirements, we
add projected sales in units to desired ending inventory and subtract beginning inventory.
The pro forma income statement is important to the overall process of constructing the pro forma balance sheet because it allows us to determine a value for
change in retained earnings.
If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January? “”””””
Net outflow $ (6,500)
Beginning cash balance $ 16,000
Cumulative cash balance $ 9,500
- 4500 loan
Answer: end cash balance = 5,000
Net cash flow =
Cash receipts - cash payments
Pro forma financial statements are
the most comprehensive means of financial forecasting.
often required by prospective creditors.
projections of financial statements for a future period.
In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the
cash budget
If the actual A ÷ R at the end of February was $12,000 and projected sales in March are $50,000, where 70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are collected in the month after the sale, what amount of cash is collected during March?
Cash collected in March=cash sales+60% of credit sales
=(50,000×0.3)+ (50,000×0.7×0.6) =$36,000+12,000 (AR)
=$48,000
A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
Old inventory
(450 units at $10) = $ 4,500
Plus new production
(500 units at $12) = $ 6,000
= $ 10,500
Less ending inventory
(250 units at $12) = ($ 3,000)
= Cost of goods sold $ 7,500
Firms that successfully increase their inventory turnover ratio will, among other things,
be able to reduce their borrowing needs.
XYZ Company has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month’s sales. June beginning inventory reflects this policy. What is June’s required production?
+ Projected sales 400 units
+ Desired ending inventory
875 = (1.25 × 700)
− Beginning inventory
500 = (1.25 × 400)
=Units to be produced, 775
When determining the projected quantity of unit sales for the next six months which of the following are used in this process?
Production requirements
beginning inventory − desired ending inventory
Projected sales
In the percent-of-sales method, an increase in dividends
will increase required new funds.
The percent-of-sales method of financial forecasting
assumes that balance sheet accounts maintain a constant relationship to sales
In forecasting a firm’s cash needs for some future period
the percent-of-sales method is a “broad-brush” approach.
cash budgets are more exact than the percent-of-sales method.
a cash budget approach can deal effectively with both level and seasonal production schedules.
