acf4 - chap 004
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Chapter
McGraw-Hill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial
Forecasting4
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Chapter Outline
Financial forecasting in a firms strategicgrowth
Three financial statements
Percent-of-sales method
Methods to determine the amount of new
funds required in advance Factors that affect cash flow
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Financial Forecasting
Ability to plan ahead and make necessarychanges before actual events occur
Outcome of a firm through external events
might be a function of both: Risk-taking desires
Ability to hedge against risk with planning
No growth or a decline - not the primarycause of shortage of funds
A comprehensive financing plan must bedeveloped for a significant growth
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Constructing Pro Forma Statements
A systems approach to develop pro formastatements consists of:
Constructing it based on:
Sales projections
Production plans
Translating it into a cash budget
Assimilating all materials into a pro formabalance sheet
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Development of
Pro Forma Statements
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Pro Forma Income Statement
Provides a projection on the anticipation ofprofits over a subsequent period
Four important steps include: Establishing a sales projection
Determining production schedule and the associateduse of new material, direct labor, and overhead toarrive at gross profit
Computing other expenses
Determining profit by completing actual pro formastatement
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Establish a Sales Projection
Let us assume Goldman Corporation hastwo primary products: wheels and casters
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Stock of Beginning Inventory
Number of units produced will depend onbeginning inventory
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Determine a Production Schedule
and the Gross Profit
To determine the production requirements:
Units
+ Projected sales+ Desired ending inventory
Beginning inventory
= Production requirements
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Production Requirements
for Six Months
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Total Production Costs
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Cost of Goods Sold
Costs associated with units sold during thetime period
Assumptions for the illustration:
FIFO accounting is used
First allocates the cost of current sales to beginninginventory
Then to goods manufactured during the period
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Allocation of Manufacturing Cost
and Determination of Gross Profits
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Value of Ending Inventory
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Other Expense Items
Must be subtracted from gross profits toarrive at net profit
Earning before taxes
General and administrative expenses, and interestexpenses are subtracted from gross profit
Aftertax income
Taxes are deducted from the earning before taxes Contribution to retained earnings
Dividends are deducted from the aftertax income
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Actual Pro Forma Income Statement
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Exercises
Page: 112
Numbers: 8 and 13
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Cash Budget
Pro forma income statement must betranslated into cash flows
The long-term is divided into short-term pro
forma income statement
More precise time frames set to help anticipatepatterns of cash inflows and outflows
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Monthly Sales Pattern
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Cash Receipts
In the case of Goldman Corporation:
The pro forma income statement is taken for thefirst half year:
Sales are divided into monthly projections
A careful analysis of past sales and collectionrecords show:
20% of sales is collected in the month 80% in the following month
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Monthly Cash Receipts
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Cash Payments
Monthly costs associated with:
Inventory manufactured during the period
Material
Labor
Overhead
Disbursements for general and administrative
expenses Interest payments, taxes, and dividends
Cash payments for new plant and equipment
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Component Costs
of Manufactured Goods
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Cash Payments (contd)
Assumptions for the next two tables:
Costs are incurred on an equal monthly basisover a six-month period
Sales volume varies each month
Employment of level monthly production toensure maximum efficiency
Payment for material, once a month afterpurchases have been made
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Average Monthly
Manufacturing Costs
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Summary of All
Monthly Cash Payments
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Actual Budget
Difference between monthly receipts andpayments is the net cash flow for the month
Allows the firm to anticipate the need for funding
at the end of each month
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Cash Budget with Borrowing
and Repayment Provisions
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Pro Forma Balance Sheet
Represents the cumulative changes overtime
Important to examine the prior periods balance
sheet
Some accounts will remain unchanged, whileothers will take new values
Information is derived from the pro forma incomestatement and cash budget
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Development of a
Pro Forma Balance Sheet (contd)
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Explanation of
Pro Forma Balance Sheet
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Analysis of Pro Forma Statement
The growth ($25,640) was financed byaccounts payable, notes payable, and profit
As reflected by the increase in retained earnings
Total assets (June 30, 2005)$76,140
Total assets (Dec 31, 2004).$50,500
Increase...$25,640
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Percent-of-Sales Method
Based on the assumption that:
Accounts on the balance sheet will maintain agiven percentage relationship to sales
Notes payable, common stock, and retainedearnings do not maintain a direct relationshipwith sales volume
Hence percentages are not computed
l Sh
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Balance Sheet
of Howard Corporation
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Percent-of-Sales Method (contd)
Funds required is ascertained
Financing is planned based on:
Notes payable
Sale of common stock
Use of long-term debt
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Percent-of-Sales Method (contd)
Company operating at full capacity needs to buy newplant and equipment to produce more goods to sell: Required new funds:
(RNF) = A (S) L (S) PS2(1 D)
S S Where: A/S = Percentage relationship of variable assets to sales;
S = Change in sales; L/S = Percentage relationship of variableliabilities to sales; P = Profit margin; S2 = New sales level; D =Dividend payout ratio
RNF = 60% ($100,000) 25% ($100,000) 6% ($300,000) (1 .50)
= $60,000 - $25000 - $18,000 (.50)
= $35,000 - $9000
= $26,000 required sources of new funds
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Percent-of-Sales Method (contd)
Company not operating at full capacity - needs to add morecurrent assets to increase sales:
RNF = 35% ($100,000) 25% ($100,000) 6% ($300,000) (1 .50)
= $35,000 - $25,000 - $18,000 (.50)
= $35,000 - $25,000 - $9,000
= $1,000 required sources of new funds
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Activity
11th Edition Numbers 20, 22
13th Edition Numbers 23, 25
Comprehensive Problems
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