SM Alk 9
SM Alk 9
SM Alk 9
Chapter 9
Prospective Analysis
REVIEW
Prospective analysis is the final step in the financial statement analysis process.
It includes forecasting of the balance sheet, income statement and statement of
cash flows. Prospective analysis is central to security valuation. Both the free
cash flow and residual income valuation models described in Chapter 1 require
estimates of future financial statements. We provide a detailed example of the
forecasting process to project the income statement, the balance sheet, and the
statement of cash flows. We describe the relevance of forecasting for security
valuation and provide an example utilizing forecasted financial statements to
implement the residual income valuation model. We discuss the concept of value
drivers and their reversion to long-run equilibrium levels. In the appendix, we
provide a detailed example of short-term cash flow forecasting.
9-1
Chapter 09 - Prospective Analysis
OUTLINE
The Projection Process
Projecting Financial Statements
Application of Prospective Analysis in the Residual Income Valuation Model
Trends in Value Drivers
Short-term Forecasting (Appendix)
9-2
Chapter 09 - Prospective Analysis
ANALYSIS OBJECTIVES
Explain the process of projecting the income statement, the balance sheet and the
statement of cash flows.
Discuss the concept of value drivers and their reversion to long-run equilibrium
levels.
9-3
Chapter 09 - Prospective Analysis
QUESTIONS
1. Prospective analysis is central to security valuation. All valuation models rely on
forecasts of earnings or cash flows that are, then, discounted back to the present to
arrive at the estimated value of the security. Prospective analysis is also useful to
examine the viability of companies strategic plans, that is, whether they will be able
to generate sufficient cash flows from operations to finance expected growth or
whether they will be required to seek external financing. In addition, prospective
analysis is useful to examine whether announcing strategies will yield the benefits
expected by management. Finally, prospective analysis can be used by creditors to
assess companies ability to meet debt service requirements.
2. Prior to the forecasting process, financial statements can be recast to better portray
economic reality. Adjustments might include elimination of transitory items or
reallocating them to past or future years, capitalizing (expensing) items that have
been expensed (capitalized) by management, capitalizing operating leases and other
forms of off-balance sheet financing, and so forth.
4. The forecast horizon is the period for which specific estimates are made. It is usually
5-7 years. Forecasts beyond the forecast horizon are of dubious value since
estimates are uncertain.
5. Since all valuation models are infinite horizon models, analysts frequently assume a
steady state into perpetuity after the forecast horizon. A common assumption is that
the company will grow at the long-run rate of inflation, that is, remaining constant in
real terms.
6. The projection process begins with an expected growth in sales. Gross profit and
operating expenses are, then, estimated as a percentage of forecasted sales using
historical ratios and external information. Depreciation expense is usually estimated
as a percentage of beginning gross depreciable assets under the assumption that
depreciation policies will remain constant. Interest expense is usually estimated at an
average borrowing rate applied to the beginning balance of interest bearing liabilities.
Projections of expected interest rates are used for variable rate indebtedness and
new borrowings. Finally, tax expense is estimated using the effective tax rate on pre-
tax income.
7. In the first step, balance sheet items are projected using forecasted income sales
(COGS) and relevant turnover ratios. Long-term assets are projected using forecasted
capital expenditures. Long-term liabilities are projected from current maturities of
long-term debt disclosed in the debt footnote, and paid-in-capital is assumed to be
constant in this stage. Retained earnings are projected adding (subtracting) projected
profits (losses) and subtracting projected dividends. Once total liabilities and equities
are forecasted, total assets is set equal to this amount and forecasted cash is
computed as the plug figure.
9-4
Chapter 09 - Prospective Analysis
In the second step, long-term liabilities and equities are adjusted to yield the desired
level of cash. The analyst must be careful to maintain the historical leverage ratio and
adjust liabilities and equities proportionately.
8. The residual income model expresses stock price as the book value of stockholders
equity plus the present value of expected residual income (RI). Residual income can
be expressed in ratio form as,
RI = (ROEt k) * BVt-1
Where ROE=NIt/BVt-1. This form highlights the fact that stock price is only impacted
so long as ROE k. In equilibrium, competitive forces will tend to drive rates of return
(ROE) to cost (k) so that abnormal profits are competed away. The estimation of stock
price, then, amounts to the projection of the reversion of ROE to its long-run value for
a particular company and industry. ROE is a value driver since it impacts our
valuation of the stock price. Its components (asset turnover and profit margin) are
also value drivers
b. The reversion is incomplete. That is, there remains a difference of about 12%
between the highest and lowest ROE firms even after ten years. This may be the
result of two factors: differences in risk that are reflected in differences in their
costs of capital (k); or, greater (lesser) degrees of conservatism in accounting
policies.
The reversion of ROA and NPM are similar. While some reversion of TAT is evident, it
is much less than that of the other value drivers.
10. Short-term cash forecasts are key to assessments of short-term liquidity. An asset is
called "liquid" because it will or can be converted into cash within the current period.
The analysis of short-term cash forecasts will reveal whether an entity will be able to
repay short-term loans as planned. This also means such analysis is extremely
important for a potential short-term credit grantor. Short-term cash forecasts often
are relatively realistic and accurate because of the shortness of the time span
covered.
11. A cash forecast, to be most meaningful, must be for a relatively short-term period of
time. There are many unpredictable variables involved in the preparation of a reliable
forecast for a highly liquid asset such as cash. Over a long period of time (that is,
beyond the time span of one year), the difference in the degree of liquidity among
items in the current assets group is usually insignificant. What is more important for
long time spans are the projections of net income and other sources and uses of
funds. The focus should be shifted to working capital (and other accrual measures),
and away from cash flows, for longer forecast horizons of, say, thirty monthswhere
the time required to convert current assets into cash is insignificant.
9-5
Chapter 09 - Prospective Analysis
9-6
Chapter 09 - Prospective Analysis
12. Cash inflows and outflows are highly interrelated. These two flows are crucial to a
companys circulation system." A deficiency in any part of the system can affect the
entire system. For example, a reduction or cessation of sales affects the vital
conversion of finished goods into receivables or cash, which in turn leads to a drop
in the cash reservoir. If the system is not strengthened by "transfusion" (such as
additional investment by owners or creditors), production must be curtailed or
discontinued. Lack of cash inflows also will reduce other expenses such as
advertising, promotion, and marketing expenses, which will further adversely affect
sales. This can yield a vicious cycle leading to business failure.
13. Most would agree with this assertion. Cash is the most liquid asset and when
management urgently needs to purchase assets or incur expenses, a cash exchange
is the quickest and easiest means to execute a transaction. Moreover, unless
management has a credit line established with a reliable outsider (such as a revolving
account at a bank), lack of cash can mean a permanent loss of profitable
opportunities.
14. Ratio analysis is a static measurement tool. Ratios measure relations among financial
statement items as of a given moment and time. In contrast, funds flow analysis is a
dynamic measure covering a period of time. A dynamic model of funds flow analysis
uses the present only as a starting point and utilizes the best available estimates of
future plans and conditions to forecast the future availability and disposition of cash
or working capital. Analyzing funds flow also encompasses the projected operations
of a company. Since one of the fundamental assumptions of accounting is the
going-concern concept, some assert that the dynamic model is more realistic and is
superior to static representations. However, care should be taken in placing too much
reliance on funds flow analysis as it is primarily based on estimates, and not on
realized observations.
15. Except for transactions involving the raising of money from external sources (such as
through loans or additional investments) and the investments of money in long-term
assets, almost all internally generated cash flows relate to and depend on sales.
Accordingly, the usual first step in preparing a cash forecast is to estimate sales for
the period under consideration. The reliability of any cash forecast depends on the
accuracy of this forecast of sales. In arriving at the sales forecast, the analyst should
consider: (1) past trends of sales volume, (2) market share, (3) industry and general
economic conditions, (4) productive and financial capacity, and (5) competitive
factors, among other variables.
9-7
Chapter 09 - Prospective Analysis
EXERCISES
Exercise 9-1 (45 minutes)
Notes:
[a] Cost of sales is estimated to be at a level representing the average percentage of cost
of sales to sales as prevailed in the four-year period ending June 30, Year 11, which is
53.1% (19,909.2 9,331.3)/19,909.2. Therefore, 6,000 x .531 = $3,186.
[b] Selling, general & administrative expenses in Year 12 are expected to increase by the
same percentage as these expenses increased from Year 10 to Year 11, which is 15%.
Therefore, $2,121.2 x 1.15 = $2,439.4.
[c] Other expenses are expected to be 8% higher in Year 12. Therefore, 32.6 x 1.08 =
$35.2.
[d] Interest expense (net of interest capitalized) and interest income will increase by 6%
due to increased financial needs. Therefore, $86.2 x 1.06 = $91.4
[e] The effective tax rate in Year 12 will equal that of Year 11, which is 42.7%
($175.7/$411.5). Therefore, tax expense = $248 x .427 = $105.9.
9-8
Chapter 09 - Prospective Analysis
9-9
Chapter 09 - Prospective Analysis
a. To illustrate how predictions of market share and total market sales can be
used in the forecasting process, consider the following example. If an analyst,
for instance, predicts that (i) Cough.com will maintain its 0.08% share of the
market for children's cough medicine and (ii) total Industry sales of children's
cough medicine for year 2006 is $3.2 billion, then a reasonable estimate of
Cough.com's year 2006 sales is $2.56 million. This is computed as 0.08%
market share multiplied by the expected $3.2 billion of industry sales.
c. Relying on predicted year 2006 total industry sales of $3.2 billion, the sales of
Cough.com are predicted to be as follows
9-10
Chapter 09 - Prospective Analysis
Lyon Corporation
Cash Forecast
For July, Year 6
9-11
Chapter 09 - Prospective Analysis
PROBLEMS
Problem 9-1 (90 minutes)
a.
Coca-Cola
Year 3
INCOME STATEMENT Estimate Year 2 Year 1
Net sales 20,297 20,092 19,889
Cost of goods 6,106 6,044 6,204
Gross profit 14,191 14,048 13,685
Selling general & administrative expense 7,972 7,893 9,221
Depreciation & amortization expense 863 803 773
Interest expense -66 -308 292
Income before tax 5,422 5,660 3,399
Income tax expense 1,620 1,691 1,222
Net income 3,802 3,969 2,177
Outstanding shares 3,491 3,491 3,481
RATIOS
9-12
Chapter 09 - Prospective Analysis
Year 3
BALANCE SHEET Estimate Year 2 Year 1
Cash 587 1,934 1,892
Receivables 1,901 1,882 1,757
Inventories 1,066 1,055 1,066
Other 2,300 2,300 1,905
Total current assets 5,854 7,171 6,620
RATIOS
AR turn 10.68 10.68 11.32
INV turn 5.73 5.73 5.82
AP turn 1.64 1.64 1.59
Tax Pay (Tax pay / tax exp) 50.33% 50.33% 49.10%
FLEV 2.06 1.97 2.24
Div/sh $1.37 $1.37 $1.21
9-13
Chapter 09 - Prospective Analysis
Year 3
Statement of Cash Flows Estimate
Net income 3,802
Depreciation 863
Inventories -11
Accounts payable 38
CAPEX -1,200
Net cash flow from investing activities -1,200
9-14
Chapter 09 - Prospective Analysis
a.
Best Buy
Year 3
Estimate Year 2 Year 1
Income statement
Net sales 18,800 15,326 12,494
RATIOS
Sales growth 22.67% 22.67%
Gross Profit Margin 19.96% 19.96%
Selling General & Administrative Exp / Sales 14.69% 14.69%
DEPRECIATION (depn exp / pr yr PPE gross) 15.28% 15.28%
Tax (Inc Tax / Pre-tax inc) 38.22% 38.22%
9-15
Chapter 09 - Prospective Analysis
Year 3
BALANCE SHEET Estimate Year 2 Year 1
Cash 196 746 751
Receivables 384 313 262
Inventories 2,168 1,767 1,184
Other 102 102 41
Total current assets 2,850 2,928 2,238
Common stock 20 20 20
Capital surplus 576 576 247
Retained earnings 1,650 1,225 828
Shareholder equity 2,246 1,821 1,095
Total liabilities & net worth 5,719 4,838 2,995
RATIOS
AR turn 48.96 48.96 47.69
INV turn 6.94 6.94 8.53
AP turn 4.96 4.96 5.93
Tax Pay (Tax pay / tax exp) 51.84% 51.84% 30.23%
FLEV 2.55 2.66 2.74
Div/sh $0.00 $0.00 $0.00
9-16
Chapter 09 - Prospective Analysis
Year 3
Statement of Cash Flows Estimate
Net income 425
Depreciation 304
Accounts receivable -71
Inventories -401
Accounts payable 561
Income taxes 9
Net cash flow from operations 827
CAPEX -1,262
Net cash flow from investing activities -1,262
b. Based on our projection, it appears that Best Buy will require about $550
Million of external financing to yield a cash balance of approximately $750
million. Analysts must allocate this external financing between debt and equity
so as to preserve the financial leverage level presently used by Best Buy.
9-17
Chapter 09 - Prospective Analysis
a.
Merck
Year 3
INCOME STATEMENT Estimate Year 2 Year 1
Net sales 56,435 47,716 40,343
Cost of goods 34,272 28,977 22,444
Gross profit 22,164 18,739 17,900
Selling general & administrative expense 7,725 6,531 6,469
Depreciation & amortization expense 1,661 1,464 1,277
Interest expense 237 342 329
Income before tax 12,541 10,403 9,824
Income tax expense 3,762 3,121 3,002
Net income 8,779 7,282 6,822
Outstanding shares 2,976 2,976 2,968
RATIOS
Sales growth 18.27% 18.27%
Gross Profit Margin 39.27% 39.27%
Selling General & Administrative Exp / Sales 13.69% 13.69%
DEPRECIATION (depn exp / pr yr PPE gross) 8.76% 8.76%
INT (int / pr yr LTD) 4.94% 4.94%
Tax (Inc Tax / Pre-tax inc) 30.00% 30.00%
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Chapter 09 - Prospective Analysis
Year 3
BALANCE SHEET Estimate Year 2 Year 1
Cash 5,254 3,287 4,255
Receivables 6,168 5,215 5,262
Inventories 4,233 3,579 3,022
Other 880 880 1,059
Total current assets 16,536 12,961 13,598
Common stock 30 30 30
Capital surplus 6,907 6,907 6,266
Retained earnings 37,123 31,500 27,395
Treasury stock 22,387 22,387 18,858
Shareholder equity 21,673 16,050 14,832
Total liabilities & net worth 51,020 44,007 40,155
RATIOS
AR turn 9.15 9.15 7.67
INV turn 8.10 8.10 7.43
AP turn 4.91 4.91 4.16
Tax Pay (Tax pay / tax exp) 50.41% 50.41% 41.45%
FLEV 2.35 2.74 2.71
Div/sh $1.06 $1.06 $0.98
CAPEX 5,100 4312 3641
CAPEX/Sales 9.04% 9.04% 9.03%
9-19
Chapter 09 - Prospective Analysis
Year 3
Statement of Cash Flows Estimate
Net income $ 8,779
Depreciation 1,661
Accounts receivable -953
Inventories -654
Accounts payable 1,079
Income taxes 323
Net cash flow from operations 10,235
CAPEX -5,100
Net cash flow from investing activities -5,100
b. Based on our initial projections, it appears that Merck will have excess cash of
approximately $2 billion in year 3. This excess cash should be used to reduce
both debt and equity so as to maintain historical financial leverage.
9-20
Chapter 09 - Prospective Analysis
Problem 9-4 (90 minutes)
($ Thousands)
Sales 25,423 28,131 31,127 34,443 38,112 42,171 46,663 48,297
Net income ($ Mil) 1,706 2,312 2,558 2,831 3,132 3,466 3,835 3,969
Net working capital 2,832 3,015 3,336 3,692 4,085 4,520 5,001 5,176
Fixed assets 15,232 17,136 18,961 20,981 23,216 25,689 28,425 29,420
Total Operating assets 18,064 20,151 22,297 24,673 27,301 30,209 33,426 34,596
L-T Liabilities 8,832 10,132 11,211 12,405 13,727 15,189 16,807 17,395
Total Stockholder's Equity ($ Mil) 9,232 10,019 11,086 12,267 13,574 15,020 16,619 17,201
9-21
Chapter 09 - Prospective Analysis
a.
Telnet Corporation
Pro Forma Income Statement ($000s)
Six Months Ended June 30, Year 2
Sales revenue ($250 x 6 mos.) ................................................................... $1,500
Cost of goods sold (note [a]) ..................................................................... 1,199
Gross margin ............................................................................................... 301
Selling and administrative expenses ($47.5 x 6 mos.) ............................. 285
Expected pre-tax income ............................................................................ 16
Estimated income taxes (at 50%) ............................................................... 8
Expected net income .................................................................................. $ 8
Ending (given) 35
Ending (given) 0
9-22
Chapter 09 - Prospective Analysis
b.
Telnet Corporation
Pro forma Balance Sheet ($000s)
June 30, Year 2
ASSETS
Cash ............................................................................. $ 40 (minimum cash)
Accounts receivable ................................................... 375 (45 days' sales)*
Inventories ($35 + $100) ............................................. 135 (given)
Prepaid expenses ....................................................... 7 (given)
Total current assets .................................................. 557 (subtotal)
Equipment ................................................................... 1,200 (given)
Less accumulated depreciation ................................ 210 ($35 x 6 mos.)
Equipment, net .......................................................... 990 (subtotal)
Patents ........................................................................ 40 (given)
Less amortization ....................................................... 3 ($500 x 6 mos.)
Patents, net ............................................................... 37 (subtotal)
Total Assets ................................................................ $1,584
9-23
Chapter 09 - Prospective Analysis
c.
Telnet Corporation
Forecasted Statement of Cash Flows
For Six Months Ended June 30, Year 2
Cash balance, beginning .................................................. $ 60,000
Add collection of accounts receivable * ........................... 1,125,000 $1,185,000
Less disbursements for
Material purchases ** .................................................... 625,000
Labor .............................................................................. 183,000
Rent ................................................................................ 60,000
Overhead ....................................................................... 135,000
Selling expense ............................................................. 285,000 (1,288,000)
Tentative cash balance ...................................................... $ (103,000)
Minimum cash balance required ....................................... 40,000
Additional borrowing required .......................................... $ 143,000
Ending cash balance ......................................................... $ 40,000
Loan balance....................................................................... $ 143,000
9-24
Chapter 09 - Prospective Analysis
Quaker Oats
Forecasted Statement of Cash Flows
For Year Ended June 30, Year 12
Cash provided by (used for) operations
Net income (a) ............................................................................................. $ 238.8
Items in income not affecting cash
Depreciation & amortization (b) ............................................................... 196.6
Deferred income taxes (c) ........................................................................ 54.7
Provision for restructuring charges (given) ........................................... 0.0
Increase in receivables (d) ......................................................................... (8.9)
Increase in inventories (e).......................................................................... (45.2)
Increase in other current assets (f) ........................................................... (25.6)
Increase in accounts payable (g) .............................................................. 42.1
Increase in other current liabilities (h) ...................................................... 24.5
Cash provided by operating activities ...................................................... $ 477.0
Notes:
(a) Average percent of income from continuing operations to sales, Years 9-11
($235.8 +$228.9 + $148.9) / ($5,491.2 + $5,030.6 + $4,879.4) = 3.98%
Net income in Year 12 = $6,000 x .0398 = $238.8
9-25
Chapter 09 - Prospective Analysis
9-26
Chapter 09 - Prospective Analysis
CASES
Case 9-1 (60 minutes)
Kodak
RATIOS
Sales growth -5.43% -5.43%
Gross Profit Margin 34.49% 34.49%
Selling General & Administrative Exp / Sales 14.07% 14.07%
DEPRECIATION (depn exp / pr yr PPE gross) 5.90% 5.90%
R&D/sales 5.89% 5.89%
INT (int / pr yr STD and LTD) 6.49% 6.49%
Tax (Inc Tax / Pre-tax inc) 29.63% 29.63%
9-27
Chapter 09 - Prospective Analysis
RATIOS
AR turn 5.66 5.66 5.27
INV turn 7.63 7.63 4.87
AP turn 2.65 2.65 2.46
FLEV 4.58 4.62 4.15
Div/sh $2.22 $2.22 $1.88
9-28
Chapter 09 - Prospective Analysis
Depreciation 766
Inventories 62
CAPEX (990)
Net cash flow from investing activities (990)
9-29
Chapter 09 - Prospective Analysis
Miller Company
Cash Forecast
For Years Ended December 31, Years 2 through 4
Year 2 Year 3 Year 4
Cash balance at beginning of period .................. $ 0 $1,929,000 $254,500
Cash received from stockholders ....................... 100,000 0 0
Proceeds of loan (see [a]) .................................... 1,700,000 100,000 0
Cash receipts less cash payments (see [b]) ...... 129,000 125,500 146,500
Payments for construction .................................. 0 (1,700,000) (100,000)
Payments on loan (see [a]) .................................. 0 (200,000) (200,000)
Cash balance at end of period............................. $1,929,000 $ 254,500 $101,000
9-30
Chapter 09 - Prospective Analysis
9-31
Chapter 09 - Prospective Analysis
Royal Company
Cash Forecast
For Years Ending March 31, Years 6 and 7
Year 6 Year 7
Beginning balance of cash ...................................... $ 0 $ 75,000
Cash receipt from customers (see Schedule A) .... 825,000 1,065,000
Cash disbursements
Direct materials (see Schedule B)......................... 220,000 245,000
Direct labor ............................................................. 300,000 360,000
Variable overhead .................................................. 100,000 120,000
Fixed costs ............................................................ 130,000 130,000
Total cash disbursements ..................................... 750,000 855,000
Operating cash receipts less disbursements ........ 75,000 210,000
Cash from sale of receivables and inventories ..... 90,000 0
Total cash available ................................................. $165,000 $ 285,000
2
Payments to general creditors ................................ 90,000 270,000
Ending balance of cash ........................................... $ 75,000 1 $ 15,000
1
This amount could have been used to pay general creditors or carried forward to the
beginning of the next year.
2
Computed as: ($600,000 x 60%) - ($50,000 + $40,000).
Schedule A
Cash Receipts from Customers
Year 6 Year 7
Sales ....................................................................................... $900,000 $1,080,000
Beginning accounts receivable ............................................. 0 75,000
Total ...................................................................................... 900,000 1,155,000
Less: Ending accounts receivable ........................................ 75,000 90,000
Cash receipts from customers .............................................. $825,000 $1,065,000
Schedule B
Cash Disbursements for Direct Materials
Year 6 Year 7
Direct materials required for production ................... $200,000 $240,000
3 4
Required ending inventory ......................................... 40,000 50,000
Total ........................................................................... 240,000 290,000
Less: Beginning inventory ......................................... 0 40,000
Purchases ................................................................. 240,000 250,000
Beginning accounts payable ...................................... 0 20,000
Total ........................................................................... 240,000 270,000
Less: Ending accounts payable ................................. 20,000 25,000
Disbursements for direct materials ........................... $220,000 $245,000
3
Computed as: 12,000 units x 2/12 = 2,000; 2,000 x $20 per unit = $40,000.
4
Computed as: 15,000 units x 2/12 = 2,500; 2,500 x $20 per unit = $50,000.
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Chapter 09 - Prospective Analysis
(2)
Estimated Cash Disbursements for Purchases
Oct. Nov. Dec. Total
Total Sales ....................................... $48,000 $60,000 $80,000
Purchases (70% next mo. sales) .... $42,000 $56,000 $25,200 $123,200
Less: 2% purchase discount .......... 840 1,120 504 2,464
Cash disbursements ....................... $41,160 $54,880 $24,696 $120,736
(3)
Estimated Cash Disbursements for Operating Expenses
Oct. Nov. Dec. Total
Sales ................................................. $48,000 $60,000 $80,000
Salaries and Wages (15%) .............. $ 7,200 $ 9,000 $12,000 $28,200
Rent (5%) .......................................... 2,400 3,000 4,000 9,400
Other Expenses (4%) ...................... 1,920 2,400 3,200 7,520
Cash disbursements ....................... $11,520 $14,400 $19,200 $45,120
(4)
Estimated Total Cash Disbursements
Oct. Nov. Dec. Total
Purchases [part (2)]......................... $41,160 $54,880 $24,696 $120,736
Operating expenses [part (3)] ........ 11,520 14,400 19,200 45,120
Plant and equipment (given) .......... 600 400 1,000
Total cash disbursements .............. $53,280 $69,680 $43,896 $166,856
(5)
Estimated Net Cash Receipts and Disbursements
Oct. Nov. Dec. Total
Total cash receipts .......................... $46,000 $57,000 $75,000 $178,000
Total cash disbursements .............. 53,280 69,680 43,896 166,856
Net cash increase ............................ $31,104 $ 11,144
Net cash decrease ........................... $ 7,280 $12,680
9-33
Chapter 09 - Prospective Analysis
(6)
Estimated Financing Required
Oct. Nov. Dec. Total
Beginning cash balance ................. $12,000 $ 8,720 $ 8,040 $12,000
Net cash increase ............................ 31,104 11,144
Net cash decrease ........................... 7,280 12,680
Cash position before financing ...... $ 4,720 $(3,960) $39,144 $23,144
Financing required .......................... 4,000 12,000 16,000
1
Interest expense ............................ (180) (180)
Financing retired ............................. (16,000) (16,000)
Ending cash balance....................... $ 8,720 $ 8,040 $22,964 $22,964
1
Computed as: ($4,000 x .06 x 3/12) + ($12,000 x .06 x 2/12).
b. (1)
Union Corporation
Forecasted Income Statement
For the Quarter Ended December 31, Year 6
Sales [see (1) in part a] ...................................................... $188,000
Deduct
Cost of goods sold (70% of sales)............................... $131,600
Less: Purchase discounts taken [see (2) in part a].... 2,464 129,136
Gross profit......................................................................... 58,864
Selling and administrative expenses
Salaries and wages [see (3) in part a] ......................... 28,200
Rent [see (3) in part a] .................................................. 9,400
Other expenses [see (3) in part a] ............................... 7,520
Depreciation ($750 x 3 months) ................................... 2,250
Total selling and administrative expenses ...................... 47,370
Operating income ............................................................... 11,494
Interest expense ................................................................. 180
Net income ....................................................................... $ 11,314
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Chapter 09 - Prospective Analysis
(2)
Union Corporation
Forecasted Balance Sheet
As of December 31, Year 6
ASSETS
Current Assets
Cash [see (6) in part a] ................................................. $ 22,964
Accounts receivable (25% of Dec. sales) .................... 20,000
Inventory [($30,000 + 70% of $36,000) x 98%] ............ 54,096
Total current assets ........................................................... $ 97,060
Plant and equipment .......................................................... 101,000
Less: Accumulated depreciation ...................................... 2,250 98,750
Total assets ........................................................................ $195,810
9-35