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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
OUTLINE
9-2
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
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.
3. In addition to trend analysis, analysts frequently incorporate external (non-financial)
information into the prospective process. Some examples are the expected level of
macroeconomic activity, the degree to which the competitive landscape is changing,
any strategic initiatives that have been announced by management, 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 pretax 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
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
9. We can make two observations regarding the reversion of ROE:
a. ROEs tend to revert to a long-run equilibrium. This reflects the forces of
competition. Furthermore, the reversion rate for the least profitable firms is
greater than that for the most profitable firms. And finally, reversion rates for the
most extreme levels of ROE are greater than those for firms at more moderate
levels of ROE.
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
9-6
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
EXERCISES
Exercise 9-1 (45 minutes)
Projected Income Statement for Year 12
Quaker Oats Company
Forecasted Income Statement
For Year Ended June 30, Year 12
Revenues [given].................................................................
$6,000.0
$3,186.0
2,439.4
35.2
91.4
5,752.0
248.0
105.9
142.1
(2.0)
$ 140.1
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
Date
Dec-Y1
Mar-Y2
Jun-Y2
Sep-Y2
Dec-Y2
Mar-Y3
Jun-Y3
Sep-Y3
Dec-Y3
Mar-Y4
Jun-Y4
Sep-Y4
Dec-Y4
Mar-Y5
Jun-Y5
Sep-Y5
Dec-Y5
Mar-Y6
Jun-Y6
Sep-Y6
Dec-Y6
Mar-Y7
Jun-Y7
Sep-Y7
Dec-Y7
Mar-Y8
Jun-Y8
Sep-Y8
Dec-Y8
Mar-Y9
Jun-Y9
Average
change
for each
quarter
Forecast
Sep.Y9*
Forecast
Dec.Y9*
Forecast
Mar. Y0*
Forecast
Jun. Y0*
Sales
$17,349
12,278
13,984
13,972
16,040
12,700
14,566
14,669
17,892
12,621
14,725
14,442
17,528
14,948
17,630
17,151
19,547
16,931
18,901
19,861
22,848
19,998
21,860
21,806
24,876
22,459
24,928
23,978
28,455
24,062
27,410
N.I.
$1,263
964
1,130
996
1,215
1,085
656
1,206
1,477
1,219
1,554
1,457
1,685
1,372
1,726
1,610
1,865
1,517
1,908
1,788
2,067
1,677
2,162
2,014
2,350
1,891
2,450
2,284
2,671
2,155
2,820
Change
In Dec.
Sales
-$1,309
Change
in Dec.
NI
Change
In March
Sales
in March
Change
$422
$121
NI
Change
In June
Sales
2,709
153
2,710
178
1,945
226
2,172
270
$1,667.67
$214.67
25,645.67
2,498.67
172
182
202
3,067
160
2,959
254
283
2,461
214
3,068
288
321
1,603
30,041.57
251
145
1,271
$1,586.57
-227
898
180
1,983
3,579
$210
153
2,905
2,028
$697
208
2,327
3,301
-$474
134
159
2,019
Change
in Sept.
NI
262
-79
-364
Change
In Sept.
Sales
-$48
$582
1,852
Change
In June
NI
$201.14 $1,683.43
264
$170.14
2,482
370
$1,918.00
$241.43
2,872.14
25,745.43
2,325.14
29,328.00
9-9
3,061.43
9-10
$ 20
$ 20
150
170
21
18
115
133
29
9-11
149
$169
104
11
$ 54
30
$ 24
$ 15
125
140
25
$115
PROBLEMS
Problem 9-1 (90 minutes)
a.
Coca-Cola
Year 3
Estimate
20,297
Year 2
20,092
Year 1
19,889
6,106
6,044
6,204
14,191
14,048
13,685
7,972
7,893
9,221
863
803
773
Interest expense
-66
-308
292
5,422
5,660
3,399
1,620
1,691
1,222
Net income
3,802
3,969
2,177
Outstanding shares
3,491
3,491
3,481
1.02%
1.02%
69.92%
69.92%
39.28%
39.28%
12.14%
12.14%
-5.45%
-5.45%
29.88%
29.88%
INCOME STATEMENT
Net sales
Cost of goods
Gross profit
Selling general & administrative expense
RATIOS
Sales growth
9-12
Year 2
1,934
1,882
1,055
2,300
7,171
Year 1
1,892
1,757
1,066
1,905
6,620
8,305
3,515
4,791
10,793
21,438
7,105
2,652
4,453
10,793
22,417
6,614
2,446
4,168
10,046
20,834
3,717
3,899
815
8,431
3,679
3,899
851
8,429
3,905
4,816
600
9,321
1,403
1,219
11,053
1,403
1,219
2,622
1,362
835
2,197
Common stock
Capital surplus
Retained earnings
Treasury stock
Shareholder equity
Total liabilities & net worth
873
3,520
19,674
13,682
10,385
21,438
873
3,520
20,655
13,682
11,366
22,417
870
3,196
18,543
13,293
9,316
20,834
RATIOS
AR turn
INV turn
AP turn
Tax Pay (Tax pay / tax exp)
FLEV
Div/sh
10.68
5.73
1.64
50.33%
2.06
$1.37
10.68
5.73
1.64
50.33%
1.97
$1.37
11.32
5.82
1.59
49.10%
2.24
$1.21
1,200
5.91%
1188
5.91%
1165
5.86%
BALANCE SHEET
Cash
Receivables
Inventories
Other
Total current assets
Property, plant & equipment
Accumulated depreciation
Net property & equipment
Other assets
Total assets
Accounts payable & accrued liabilities
Short-term debt & cmltd
Income taxes
Total current liab
CAPEX
CAPEX/Sales
9-13
3,802
Depreciation
863
Accounts receivable
-19
Inventories
-11
Accounts payable
38
Income taxes
-36
4,636
CAPEX
Net cash flow from investing activities
-1,200
-1,200
0
0
-4,783
-4,783
_____
-1,347
1,934
587
9-14
Year 2
Year 1
Net sales
18,800
15,326
12,494
Cost of goods
15,048
12,267
10,101
Gross profit
3,752
3,059
2,393
2,761
2,251
1,728
304
167
103
688
641
562
263
245
215
Net income
425
396
347
Outstanding shares
208
208
200
Sales growth
22.67%
22.67%
19.96%
19.96%
14.69%
14.69%
15.28%
15.28%
38.22%
38.22%
Income statement
RATIOS
9-15
Year 2
746
313
1,767
102
2,928
Year 1
751
262
1,184
41
2,238
3,249
847
2,403
466
5,719
1,987
543
1,444
466
4,838
1,093
395
698
59
2,995
3,034
114
136
3,284
2,473
114
127
2,714
1,704
16
65
1,785
122
67
189
122
181
303
100
15
115
Common stock
Capital surplus
Retained earnings
Shareholder equity
Total liabilities & net worth
20
576
1,650
2,246
5,719
20
576
1,225
1,821
4,838
20
247
828
1,095
2,995
RATIOS
AR turn
INV turn
AP turn
Tax Pay (Tax pay / tax exp)
FLEV
Div/sh
48.96
6.94
4.96
51.84%
2.55
$0.00
48.96
6.94
4.96
51.84%
2.66
$0.00
47.69
8.53
5.93
30.23%
2.74
$0.00
1,262
6.71%
1029
6.71%
416
3.33%
BALANCE SHEET
Cash
Receivables
Inventories
Other
Total current assets
CAPEX
CAPEX/Sales
9-16
-1,262
-1,262
-114
0
0
-114
____
-550
746
196
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
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
7,725
6,531
6,469
1,661
1,464
1,277
237
342
329
12,541
10,403
9,824
3,762
3,121
3,002
Net income
8,779
7,282
6,822
Outstanding shares
2,976
2,976
2,968
Sales growth
18.27%
18.27%
39.27%
39.27%
13.69%
13.69%
8.76%
8.76%
4.94%
4.94%
30.00%
30.00%
INCOME STATEMENT
Interest expense
Income before tax
RATIOS
9-18
Year 2
3,287
5,215
3,579
880
12,961
Year 1
4,255
5,262
3,022
1,059
13,598
24,056
7,514
16,543
17,942
51,020
18,956
5,853
13,103
17,942
44,007
16,707
5,225
11,482
15,075
40,155
6,983
4,067
1,897
12,947
5,904
4,067
1,573
11,544
5,391
3,319
1,244
9,954
11,614
4,787
29,347
11,614
4,799
27,957
11,768
3,601
25,323
Common stock
Capital surplus
Retained earnings
Treasury stock
Shareholder equity
Total liabilities & net worth
30
6,907
37,123
22,387
21,673
51,020
30
6,907
31,500
22,387
16,050
44,007
30
6,266
27,395
18,858
14,832
40,155
RATIOS
AR turn
INV turn
AP turn
Tax Pay (Tax pay / tax exp)
FLEV
Div/sh
CAPEX
CAPEX/Sales
9.15
8.10
4.91
50.41%
2.35
$1.06
5,100
9.04%
9.15
8.10
4.91
50.41%
2.74
$1.06
4312
9.04%
7.67
7.43
4.16
41.45%
2.71
$0.98
3641
9.03%
BALANCE SHEET
Cash
Receivables
Inventories
Other
Total current assets
9-19
$ 8,779
Depreciation
1,661
Accounts receivable
-953
Inventories
-654
Accounts payable
1,079
Income taxes
323
10,235
CAPEX
-5,100
-5,100
-12
Dividends
-3,156
-3,168
_____
1,967
Beginning cash
3,287
Ending cash
5,254
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
Forecast
Year 6
Year 7
20x8
Terminal
Year
20x8
8.50%
6.71%
8.98
1.67
1.96
10.65%
8.22%
9.33
1.64
2.01
10.65%
8.22%
9.33
1.64
2.01
12.5%
10.65%
8.22%
9.33
1.64
2.01
10.65%
8.22%
9.33
1.64
2.01
10.65%
8.22%
9.33
1.64
2.01
10.65%
8.22%
9.33
1.64
2.01
3.50%
8.22%
9.33
1.64
2.01
25,423
1,706
2,832
15,232
18,064
8,832
9,232
28,131
2,312
3,015
17,136
20,151
10,132
10,019
31,127
2,558
3,336
18,961
22,297
11,211
11,086
34,443
2,831
3,692
20,981
24,673
12,405
12,267
38,112
3,132
4,085
23,216
27,301
13,727
13,574
42,171
3,466
4,520
25,689
30,209
15,189
15,020
46,663
3,835
5,001
28,425
33,426
16,807
16,619
48,297
3,969
5,176
29,420
34,596
17,395
17,201
2,558
10,019
12.5%
1,252
1,306
0.89
2,831
11,086
12.5%
1,386
1,445
0.79
3,132
12,267
12.5%
1,533
1,599
0.70
3,466
13,574
12.5%
1,697
1,769
0.62
3,835
15,020
12.5%
1,877
1,958
0.55
3,969
16,619
12.5%
2,077
1,892
1,161
1,161
1,142
2,303
1,123
3,425
1,105
4,530
1,086
5,616
11,665
10,019
27,301
1,737
$15.72
Horizon
Year 4 Year 5
9-21
$1,500
1,199
301
285
16
0
750
715
35
Work in Process Inventory
Beginning (given)
From raw materials inventory [a]
Labor ($30.5 x 6 mos.)
Variable overhead ($22.5 x 6 mos.)
Rent ($10 x 6 mos.)
Depreciation ($35 x 6 mos.)
Patent amortization ($.5 x 6 mos.)
Ending (given)
0
715
183
135
60
210
3
7
1,299
0
Finished Goods Inventory
Beginning (given)
From W.I.P. inventory [b]
Ending (given)
0
1,299
1,199
100
9-22
40
(minimum cash)
375
135
(given)
(given)
557
(subtotal)
Equipment ...................................................................
1,200
(given)
210
($35 x 6 mos.)
990
(subtotal)
Patents ........................................................................
40
(given)
($500 x 6 mos.)
37
(subtotal)
Stockholders' equity...................................................
1,300
(given)
Retained earnings.......................................................
143
"plug"
9-23
60,000
1,125,000
$1,185,000
625,000
Labor ..............................................................................
183,000
Rent ................................................................................
60,000
Overhead .......................................................................
135,000
285,000
(1,288,000)
$ (103,000)
40,000
$ 143,000
Loan balance.......................................................................
$ 143,000
40,000
Jan.
250
0
0
Feb.
250
125
125
Mar.
250
250
375
Apr.
250
250
625
May
250
250
875
June
250
250
1,125
Jan.
125
0
0
Feb.
125
125
125
Mar.
125
125
250
Apr.
125
125
375
May
125
125
500
June
125
125
625
9-24
$ 238.8
196.6
54.7
0.0
(8.9)
(45.2)
(25.6)
42.1
24.5
$ 477.0
$ (300.0)
20.0
(30.0)
$ (310.0)
$ (45.0)
(40.0)
(135.0)
55.8
$(164.2)
2.8
30.2
$ 33.0
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
9-26
CASES
Case 9-1 (60 minutes)
Kodak
INCOME STATEMENT
20x7 Est
20x6
20x5
12,515
13,234
13,994
Cost of goods
8,199
8,670
8,375
Gross profit
4,316
4,564
5,619
1,761
1,862
1,776
Depreciation expense
766
765
738
737
779
784
Goodwill amortization
154
151
659
-44
1,052
345
2,214
208
219
178
18
18
-96
827
108
2,132
245
32
725
Net income
582
76
1,407
Outstanding shares
290
290
290
-5.43%
34.49%
14.07%
5.90%
5.89%
6.49%
29.63%
-5.43%
34.49%
14.07%
5.90%
5.89%
6.49%
29.63%
Net sales
RATIOS
Sales growth
Gross Profit Margin
Selling General & Administrative Exp / Sales
DEPRECIATION (depn exp / pr yr PPE gross)
R&D/sales
INT (int / pr yr STD and LTD)
Tax (Inc Tax / Pre-tax inc)
9-27
20x7 Est
$ 17
2,210
1,075
761
4,064
20x6
448
2,337
1,137
761
4,683
20x5
246
2,653
1,718
874
5,491
3,098
1,378
13
544
5,033
3,276
1,378
156
544
5,354
1,653
2,728
720
10,134
1,666
2,728
720
10,468
1,166
2,722
681
10,784
Common stock
Capital surplus
Retained earnings
Treasury stock
Shareholder equity
Total liabilities & net worth
978
849
6,773
5,767
2,833
12,967
978
849
6,834
5,767
2,894
13,362
978
871
7,387
5,808
3,428
14,212
5.66
7.63
2.65
4.58
$2.22
5.66
7.63
2.65
4.62
$2.22
5.27
4.87
2.46
4.15
$1.88
990
7.91%
1047
7.91%
783
5.60%
RATIOS
AR turn
INV turn
AP turn
FLEV
Div/sh
CAPEX
CAPEX/Sales
9-28
3,403
2,058
148 (NOTE 8)
606
6,215
20x7 Estim.
Net income
$ 582
Depreciation
766
Accounts receivable
127
Inventories
62
Accounts payable
(178)
1,359
CAPEX
Net cash flow from investing activities
(990)
(990)
(156)
(643)
(799)
_____
(431)
448
$ 17
9-29
Year 4
$254,500
0
0
146,500
(100,000)
(200,000)
$101,000
9-30
Interest
or Fee
$ 800,000
500,000
$ 2,500
300,000
1,250
100,000
1,000
$1,700,000
40,000
18,750
7,500
$71,000
100,000
250
(100,000)
(100,000)
$1,600,000
21,250
22,500
42,500
$86,500
(100,000)
(100,000)
$1,400,000
40,000
37,500
$77,500
Year 3
Year 4
$212,000
$224,000
Results of operations
Interest and commitment fees (above) ......................
71,000
86,500
77,500
129,000
125,500
146,500
150,000
159,000
168,000
$ 21,000
33,500
21,500
21,000
54,500
$ 54,500
$ 76,000
9-31
Year 7
75,000
825,000
1,065,000
220,000
300,000
100,000
130,000
750,000
75,000
245,000
360,000
120,000
130,000
855,000
210,000
90,000
$165,000
0
$ 285,000
90,000
$ 75,000 1
270,000
$ 15,000
This amount could have been used to pay general creditors or carried forward to the
beginning of the next year.
Computed as: ($600,000 x 60%) - ($50,000 + $40,000).
Schedule A
Cash Receipts from Customers
Year 6
Sales ....................................................................................... $900,000
Beginning accounts receivable .............................................
0
Total ......................................................................................
900,000
Less: Ending accounts receivable ........................................
75,000
Cash receipts from customers .............................................. $825,000
Year 7
$1,080,000
75,000
1,155,000
90,000
$1,065,000
Schedule B
Cash Disbursements for Direct Materials
Year 6
Direct materials required for production ...................
$200,000
Required ending inventory .........................................
40,000
Total ...........................................................................
240,000
Less: Beginning inventory .........................................
0
Purchases .................................................................
240,000
Beginning accounts payable ......................................
0
Total ...........................................................................
240,000
Less: Ending accounts payable .................................
20,000
Disbursements for direct materials ...........................
$220,000
3
4
Computed as: 12,000 units x 2/12 = 2,000; 2,000 x $20 per unit = $40,000.
Computed as: 15,000 units x 2/12 = 2,500; 2,500 x $20 per unit = $50,000.
9-32
Year 7
$240,000
50,000
290,000
40,000
250,000
20,000
270,000
25,000
$245,000
Nov.
$60,000
15,000
$60,000
12,000
$57,000
Dec.
$80,000
20,000
15,000
$75,000
(2)
Estimated Cash Disbursements for Purchases
Oct.
Nov.
Dec.
Total Sales .......................................
$48,000 $60,000
$80,000
Purchases (70% next mo. sales) ....
Less: 2% purchase discount ..........
Cash disbursements .......................
$42,000
840
$41,160
$56,000
1,120
$54,880
Total
$25,200 $123,200
504
2,464
$24,696 $120,736
(3)
Estimated Cash Disbursements for Operating Expenses
Oct.
Nov.
Dec.
Sales ................................................. $48,000
$60,000
$80,000
Salaries and Wages (15%) ..............
Rent (5%) ..........................................
Other Expenses (4%) ......................
Cash disbursements .......................
$ 7,200
2,400
1,920
$11,520
$ 9,000
3,000
2,400
$14,400
Total
$12,000
4,000
3,200
$19,200
$28,200
9,400
7,520
$45,120
Total
$120,736
45,120
1,000
$166,856
(4)
(5)
Estimated Net Cash Receipts and Disbursements
Oct.
Nov.
Dec.
Total cash receipts .......................... $46,000
$57,000
$75,000
Total cash disbursements ..............
53,280
69,680
43,896
Net cash increase ............................
$31,104
Net cash decrease ........................... $ 7,280
$12,680
9-33
Total
$178,000
166,856
$ 11,144
$12,000
Dec.
$ 8,720
7,280
$ 4,720
4,000
Total
$ 8,040
$12,000
31,104
11,144
$39,144
$23,144
12,680
$(3,960)
12,000
16,000
(180)
(180)
(16,000)
(16,000)
$22,964
$22,964
$ 8,720
$ 8,040
b. (1)
Union Corporation
Forecasted Income Statement
For the Quarter Ended December 31, Year 6
$188,000
Deduct
Cost of goods sold (70% of sales)...............................
$131,600
2,464
Gross profit.........................................................................
129,136
58,864
28,200
9,400
7,520
2,250
47,370
11,494
180
$ 11,314
9-34
ASSETS
Current Assets
Cash [see (6) in part a] .................................................
$ 22,964
20,000
54,096
$ 97,060
101,000
2,250
98,750
$195,810
195,810
$195,810
9-35