Reasonableness of forecast assumptions

Question 1

What are the matters to be considered when reviewing the reasonableness of assumptions underlying the receipts in a cash flow forecast? (4)

Answer 1

The economic climate and market research support growth expectations
Inflows need to reflect gradual increases in receipts (what is the client expecting to see)
Receipts affected by seasonal fluctuations
Inflows subjected to sensitivity analysis

Question 2

What are the matters to be considered when reviewing the reasonableness of assumptions underlying the payments in a cash flow forecast? (4)

Answer 2

Payments to suppliers reflect company’s payment policies
Payments to HMRC, VAT, PAYE, NIC, Corp tax consistent with profit forecasts, paid on time
Interest payments reflects level of borrowing, are in line with market expectation rates
Interest and repayments on loans paid on due dates

Question 3

Name some revenue assumptions (3)

Answer 3

Market conditions
Historical performance
Future events

Question 4

Name some expense assumptions (4)

Answer 4

OPEX
Interest e.g interest on borrowings
Purchases
Do these align with expansion plans?

Question 5

Matters you would consider when reviewing the reasonableness of the assumptions of the receipt of a bank loan?

Answer 5

New loan received from bank:
Is should be large enough to cover expected costs of the expenditure in forecast
It should be received after date of review of FS for bank BUT before expenses are incurred