R - Forecasting Financial Statements Aug01 - Clark McQueen

8/12/2019 R - Forecasting Financial Statements Aug01 - Clark McQueen

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FORECASTING FINANCIAL STATEMENTS: PROFORMA ANALYSIS

Roger Clarke and Grant McQueen

August 2001

ABSTRACT

This teaching note explains why and how managers proect !inancial statements into the !uture" The noteis designed !or an introduction to corporate !inance class" The note prepares students !or either a casesuch as Clarkson #um$er or a real%word proect in which pro!orma statements are needed" This noteexplains how to $uild a pro!orma $alance sheet and intentionally does not include a complete pro!ormaincome statement so that the students will ha&e to demonstrate some ingenuity when doing the !ollow%oncase or proect" The note is a nice supplement to $oth the ad&ance and remedial corporate !inance text$ooks" The more ad&anced $ooks 'e"g"( Ross( )ester!ield( and *a!!e+ typically gi&e short shri!t to thetopic o! !orecasting and the more remedial text $ooks 'e"g"( ,lock and -irt+ typically $uild the !orecastedstatements presupposing the manager knows production proections 'e"g" the type( num$er( and price o!units to $e $ought( produced( and sold+"

Roger Clark is with Analytic%T.A Glo$al Asset Management and an Adunct /ro!essor in the Marriott.chool at ,righam oung ni&ersity" Grant McQueen is the )illiam dwards /ro!essor o! 3inance inthe Marriott .chool at ,righam oung ni&ersity" The authors thank colleges at , and A. and theresearch assistance and students !or their contri$utions" .end correspondence to Grant McQueen( 451T6R,( Marriott .chool( ,righam oung ni&ersity( /ro&o T 78402" email9grant:mc;ueen


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A!ter $uilding a pro!orma $alance sheet $ased on expected sales( a manager can then use sensiti&ity

analyses to answer ;uestions such as how the company=s !inancial needs will change i! sales are 10

percent $elow their expected le&el( etc"

/ro!orma $alance sheets are created $y !orecasting the indi&idual account $alances at a !uture

date and then aggregating them into a !inancial statement !ormat" Account $alances are !orecasted $y

identi!ying the !orces that in!luence them and proecting how the accounts will $e in!luenced in the !uture

$y such !orces" .ales( company policy( and restricti&e de$t co&enants are o!ten signi!icant !orces"1

n this teaching note( a hypothetical !irm is used to illustrate the pro!orma process" Three years o!

historical data( 1DD4 to 1DD7( are gi&en !or the hypothetical !irm" Then( $ased on this historical data( a

pro!orma $alance sheet !or 1DDD is de&eloped $ased on sales !orecast !or 1DDD along with company

policies and constraints"

1 ,e!ore agreeing to a loan( lenders o!ten re;uire $orrows to a$ide $y restricti&e co&enants" 3or example( a $ankcould re;uire that a $usiness keep its de$t to asset ratio $elow 8E percent( its current ratio a$o&e 1"F( and its di&idend payoutratio $elow 2E percent" ,reaking a co&enant ?triggers@ a de!ault and the lenders right to call the loan" Although $ankspull the ?trigger(@ they seldom call the loan" Hoing so o!ten results in $ankruptcy !or the company( $ad pu$licity !or the$ank( and costly legal $ills" -owe&er( the trigger !orces the $orrower to return to the $argaining ta$le where the lender candemand a plan !or correcti&e action( a higher interest rate( more collateral andIor extra co&enants"


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II SALES FORECAST

The !irst step in preparing pro!orma !inancial statements is to !orecast sales" .ales normally

in!luence the current asset and current lia$ility account $alances" 3or example9 as sales increase( the !irm

will generally need to carry more in&entory and will ha&e a larger accounts recei&a$le $alance" Retained

earnings are also tied to sales through the pro!it margin and di&idend payout ratio" Although di!!icult(

!orecasting sales is essential" .ales typically depend on the industry( the economy( the season( and many

other !actors"

Industry: n a generic sense( the two main &aria$les in sales re&enue are unit price and &olume"These two &aria$les usually ha&e a reciprocal relationship 'i"e"( a typical demand cur&e+" There!ore( astatement that( Junit demand will increase $y 20 percent o&er the next !i&e yearsJ need not mean thatsales re&enues 'unit price times &olume+ will increase $y the same amount o&er that time period"

An industry that is restructuring may dramatically shi!t market share among its participants" .ales!orecasters need to identi!y important trends and ;uanti!y their impact on the company=s $usiness"

Economy: conomic $usiness cycles 'expansions and recessions+ can ha&e a dramatic in!luenceon some companies( exacer$ating the !orecasting pro$lem" Cyclicity not only a!!ects the le&el o! sales($ut also may change the relationship $etween sales and the $alance sheet accounts" ndustries thatre;uire a great deal o! capital in&estment tend to add capacity in large chunks" nit prices rise and !alldepending on whether there is currently a shortage or surplus o! capacity in the industry" Thus( thepro!orma techni;ues 'introduced $elow+ must $e modi!ied !or cyclical industries( particularly i!experiencing a down turn"

Sesons: ear%end pro!orma $alance sheets can proect the external !inancing needs o! acompany under speci!ic conditionsK howe&er( they are static" )hen sales are seasonal( peak !inancingneeds may exceed the pro!orma proection $ecause the pro!orma is Jout o! season"J 3urthermore(historical end%o!%year relationships $etween sales and $alance sheet accounts may di!!er during the peak"3or example( a toy manu!acturer=s accounts recei&a$le may a&erage E percent o! annual sales e&ery yearon the Hecem$er F1st annual report" -owe&er( during the sales peak in August when retailers stock up!or Christmas( accounts recei&a$le might swell to F0 percent o! sales" 3urthermore( in .eptem$er(in&entory may peak at 2E percent o! sales e&en though in Hecem$er in&entory may $e much smaller" Theanalyst must de&elop monthly pro!orma $alance sheets to $ecome aware o! seasonality in order toarrange !or a su!!icient line o! credit"

Ta$le 1 shows that sales !or the hypothetical !irm ha&e grown !rom L201 'all num$ers are in thousands+

in 1DD4 to LF1D in 1DD7" Armed with this in!ormation and knowledge a$out the industry and economy(

management $elie&es that sales will increase to LFE0 in 1DDD"


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III TRIAL PROFORMA

A! Current Assets nd Current L"#"$"t"es

-a&ing o$tained a sales !orecast( the trial pro!orma $alance sheet can $e created" Accounts that

tend to &ary with sales are typically !orecasted !irst" !ten the current assets and lia$ilities( such as

accounts recei&a$le( in&entory( and accounts paya$le( will mo&e with sales" 3or example( a !irm may

make a relati&ely constant 80 percent o! sales on credit" n contrast( other accounts( such as long%term

de$t and di&idends may $e dri&en $y o&ert management decisions( not sales" .ome accounts such as

plant and e;uipment may ha&e a relationship to sales in the long run( $ut not necessarily !rom year to

year" 3or example( a !irm could ha&e excess capacity allowing sales to grow without in&esting in new

assets" Then( when the plant and e;uipment $ecome capacity constrained( these !ixed assets may grow at

a !aster rate than sales since e;uipment and !actories tend to come in ?lumpy@ amounts" t may $e hard to

$uy 10 percent o! a !actory when sales increase $y 10 percent"

Three common ways to descri$e the historical relationship $etween sales and the current accounts

are9 percent o! sales( ratios( and regression analysis" 3or illustrati&e purposes( in&entory and accounts

paya$le will $e !orecasted using the percent o! sales method( accounts recei&a$les and net income will $e

!orecasted using ratios( and cash will $e !orecasted using regression analysis"

Percent%e o& S$es:Ta$le 1 shows the le&el o! sales( the current accounts( and net income !or1DD4 through 1DD7" n&entory was 1F"E( 12"7( and 18"2 percent o! sales !or 1DD4( 1DD5( and 1DD7(respecti&ely" n a&erage2( in&entory has $een 1F"E percent o! sales" Thus( gi&en the sales !orecast o!LFE0( in&entory is !orecasted to $e L85"F 0"1FE'LFE0+" n a&erage accounts paya$le has $een 7"5percent o! salesK thus( accounts paya$le is estimated to $e LF0"E 0"075'LFE0+"

Rt"os:sing the accounts recei&a$le and net income data !rom Ta$le 1( the a&erage collectionperiod and the pro!it margin ratios can $e calculated" Assuming all sales were on credit and a F4E day

year( the !irm took F7( 80( and 8F days to collect the typical account in 1DD4( 1DD5( and 1DD7(respecti&ely" Gi&en these ratios and some planned impro&ements in the $illing and collection processes(management $elie&es that next years recei&a$les will $e collected in 80 days( on a&erage" Thus( nextyears recei&a$les account is !orecasted to $e LF7"8 80'LFE0IF4E+" The !irms pro!it margin ranged!rom 4"1 percent in 1DD5 to 8"7 percent in 1DD7 and a&eraged E"8 percent" sing this three%year a&erage(net income !or 1DDD is !orecasted to $e L17"D 0"0E8'LFE0+F"

2 n this example we use the a&erage or mean in connection with the percentage o! sales method" -owe&er( therewill $e situations when it makes more sense to use another statistical measure such as the mode or median" ou may also!ind it appropriate to use your own udgment in extrapolating an upward or downward trend"


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Re%ress"on: 3igure 1 illustrates the regression techni;ue !or cash" The cash $alances ha&e $eenplotted against sales and the J$est !itJ lines drawn in" This line or statistical relationship along with thesales !orecast o! LFE0 can $e used to !orecast the new le&el o! cash" .peci!ically( 1DDD !orecasted cashwill $e L17"E 0"DF N 0"0E'FE0+" nless the intercept term in the regression e;uation is close to >ero(the percent o! sales method and the regression techni;ue will gi&e slightly di!!erent estimates" Generally(the regression estimate is more accurate $ecause it allows !or a $ase amount o! the asset when sales are

>ero" Appendix A gi&es e;uations !or !inding the J$est !it line(J which is the line that minimi>es the sumo! the s;uared errors" -owe&er( in practice( the regression !unction or chart !unction in xcel are used to!ind the regression line"

Two ca&eats are appropriate when applying the percent o! sales( ratio( and regression approaches"

The !irst concerns the num$er o! years o! historical data and the second concerns potential pro$lems

associated with !orecasting accounts $ased on sales" 3irst( udgment is needed in determining how !ar

into the past one should go in estimating the historical relationship" n the example( three years o! data

were used" -owe&er( i! a !irm=s policies or $usiness en&ironment has changed( then perhaps only the last

year o! data is rele&ant in predicting the !uture" n the other hand( i! policies and the en&ironment ha&e

$een sta$le( then perhaps 4 or 5 years o! historical data should $e used"

.econd( all three o! the a$o&e techni;ues are $ased on a historical relationship $etween &arious

accounts and sales" These historical relationships may not always hold" A conscious change in policy

will alter the historical relationship" 3or example( due to high margins( a !irm may decide to li$erali>e its

credit policy( extending credit to customers with weaker !inancial positions" )hen the analyst suspects a

policy change might occur or when he wants to see the conse;uences o! a recommended change( then the

historical data can( at $est( only ser&e as a starting place to make new estimates" A management decision

to purchase in&entory $ased on the economic order ;uantity 'Q+ model will also $reak historical

patterns" As sales grow( in&entory amounts will not( $ut the !re;uency o! orders will" Relationships

with sales may also change as the company grows" n the regression example( cash was !orecasted to

increase E cents with e&ery dollar o! sales" This relationship may only $e true in a rele&ant range o! sales(

say !rom L200 to LF2E thousand" A$o&e LF2E( the relationship may change $ecause o! economies o!

scale or using technology such as a lock$ox and concentration $ank system that were not !easi$le when

the !irm was small" The critical point is that proformas are not just linear projections of the past"

F 6otice that !or net income( the percent o! sales and the ratio approaches are identical"


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/ro!ormas are learning and planning tools used to identi!y the pro$lems associated with another year o!

?$usiness as usual(@ to help try out solutions to those pro$lems $e!ore they occur" The manager must

gather in!ormation a$out the past( present( and !uture( then de&elop the $est contingency plans possi$le"

B! Non'S$es Determ"ned Accounts

Retained Earnings.The retained earnings account on the $alance sheet is a !unction o! a !irm=s

pro!ita$ility and its di&idend policy" #ike the current accounts( the !irm=s pro!its are usually closely linked

with sales" To !orecast next years retained earnings( the analyst must !irst !orecast net income and then

speci!y how much will $e paid out in di&idends" Retained earnings on the $alance sheet is a cumulati&e

accountK growing each year $y net income and shrinking $y di&idends"

3orecasted Current 6et

Retained Retained Nncome%Hi&idends

arnings arnings

Two assumptions are commonly made !or the !irm=s di&idend policy" Analysts will o!ten assume that

di&idends are either a constant dollar amount or a constant proportion o! earnings" ur hypothetical !irm

has 7"D thousand shares outstanding and initially plans on paying L1 per share in di&idends in 1DDD" Thus(

management initially expects that L7"D o! the L17"D net income will $e paid out as a di&idend in 1DDD"

Gi&en that the hypothetical !irms $eginning retained earnings is L74"2( the !orecasted 1DDD retained

ending earnings will increase $y L10"0 to a new le&el o! LD4"2 L74"2 N L17"D % L7"D"

Other Accounts" ther accounts on the $alance sheet o!ten do not ha&e such a close relationship

to the le&el o! sales as do the current accounts" Typically( each o! these other accounts needs to $e

treated indi&idually" .uch accounts may $e held constant at their current dollar le&el or changed in some

speci!ied way unrelated to sales &olume" The !ollowing are some assumptions that are commonly used

when estimating other accounts"

Account Common Assumptions6et plant and '1+ Constant 'i! unused capacity exists+e;uipment '/O+ '2+ /ercent o! sales

'F+ 3orecast Current N Capital % Hepreciation


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/O /O expenditures

#ong%term '1+ Constant dollar amount in trial pro!orma8

de$t '#TH+ '2+ 3orecast Current % He$t N /roceeds !rom#TH #TH repayments new de$t

Common stock 'C.+ '1+ Constant dollar amount in trial pro!orma'2+ 3orecast Current N /roceeds !rom % Repurchase

C. C. .ale o! new stock o! stock

6otes paya$le '1+ -eld constant in the trial pro!orma" ccasionally( notes paya$le are used tomake the sheet $alance( assuming any new external !unds re;uired will $e$orrowed !rom the $ank"

As in the case o! !orecasting current assets and lia$ilities( good udgment is necessary when !orecasting

these accounts( $ecause each situation is di!!erent" The good manager will glean in!ormation !rom past

data( present policies( and !uture expectations( then make the $est estimate possi$le"

n 1DDD( the hypothetical company plans to $uy a new truck !or L14 and expects depreciation !or

the year to $e LF"0" Additionally( L2"0 o! the long%term de$t must $e retired through a sinking !und

payment"

C! E(tern$ F"nnc"n% Re)u"red

n the end( the $alance sheet must $alance" Any short!all will need to $e !inanced through

additional external !inancing" This additional !inancing is sometimes re!erred to as the ?plug !igure"@

Ta$le 2 illustrates the trial pro!orma $alance sheet with its L7"D plug !igure" ach o! the accounts in

Ta$le 2 lists the speci!ic assumptions made in !orecasting the $alance sheet" The plug !igure shows how

much external !inancing will $e needed in order !or the !irm=s sources and uses o! !unds to $alance"

3or this hypothetical !irm( the plug !igure is a positi&e L7"D( indicating that external !inancing is

re;uired to e;uate assets with lia$ilities and owners e;uity" n some cases( howe&er( the plug !igure may

$e negati&e" A negati&e plug !igure indicates that the !irm has internally generated more than enough

!unds to !inance the proected assets" n this case( the excess !unds can $e used in many ways including

paying o!! notes paya$le( in&esting in marketa$le securities( or increasing the amount o! di&idends paid

8 n the trial pro!orma( long%term de$t and common stock are o!ten held constant until the amount o! the loanre;uired is !ound" Then( the permissi$le amounts o! de$t $ased on loan restrictions might $e added( with any residual$alance co&ered $y e;uity"


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out"

I* SOURCES OF E+TERNAL FINANCING

! the plug !igure is positi&e( as in the example( the !irm can decide how $est to raise the re;uired

external !unds" ! course( the $est solution is to reduce cost to increase pro!itsK $ut( assuming the

company is already operating e!!iciently( then some other source o! !unding the short!all is needed" n

some situations the !irm may decide to use all short%term !inancing or notes paya$le" This will decrease

the !irm=s proected current ratio and increase the !irm=s de$t ratio" To raise all the !unds with long%term

de$t will lea&e the current ratio una!!ected $ut increase the !irm=s de$t ratio" The mix o! short%term

&ersus long%term de$t will depend on the !irm=s credit a&aila$ility( $orrowing constraints( and

expectations o! interest rates"

! the de$t choices cannot $e used to !und all o! the external !inancing needs( the !irm must raise

the remainder with e;uity !inancing" ither new stock must $e sold or less money paid out in di&idends"

As a last resort( the !irm may ha&e to decrease its use o! !unds to the point that the uses can $e !unded

with a&aila$le sources" n this situation( the !irm=s proected growth is $eyond its a&aila$le means" The

proected growth cannot $e sustained with a&aila$le !unds and growth will ha&e to $e slowed" ! course(

one can slow growth in unit sales $y raising prices"

.uppose our hypothetical !irm( due to a com$ination o! de$t co&enants and management policies(

needs to maintain a current ratio o! at least 1"2 and a total de$t ratio o! no more than 84P" ! the !irm

uses de$t to !inance its needs as much as possi$le( will it need to use any additional e;uity Ta$le F helps

answer this ;uestion" ! notes paya$le is expanded to the limit o! the current ratio constraint and long%

term de$t is expanded to the total de$t ratio constraint( some additional e;uity will still $e needed to

!inance the expansion" Thus( in the !inal pro!orma in Ta$le F( the L7"D plug !igure is spread among three

solutions9 L2"F extra notes paya$le( LF"4 extra long%term de$t( and LF"0 less in di&idends"E

E )hen negotiating with a $ank !or a new loan( a manager must $e a$le to ;uickly and concisely answer the!ollowing !i&e ;uestions9 -ow much do you need -ow long do you need it )hat will you do with it -ow will you repayit And( i! that doesnt work( then how else will you repay it


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n this example( net income was !ound using the pro!it margin ratio" Typically( managers will

!orecast a pro!orma income statement( complete with estimates o! expenses such as cost o! goods sold(

selling and administration expense( interest( and taxes" )hen a pro!orma income statement and $alance

sheet are created simultaneously( care must $e taken to tie the two together" 3or example( interest

expense on the income statement must $e related to the le&el o! interest $earing de$t on the $alance

sheet"4 The le&el o! de$t also !eeds $ack into the income statement $y way o! taxes" -igher interest

lowers the $e!ore tax pro!it and thus the amount o! income taxes" Although this teaching note !ocuses on

the pro!orma $alance sheet( many o! the principles extend to pro!orma income statements and the

interrelationships $etween the two"

3rom Ta$le F we can construct a pro!orma statement o! cash !low to illustrate where the cash is

!orecasted to come !rom and where it is !orecasted to go" The statement o! cash !low is reported in

Ta$le 8"

* ,UIC- AND DIRTY APPROAC.

! the sources and uses o! !unds are estimated as a constant percent o! sales( the amount o! external

!inancing o&er a one%year period can $e calculated with a short%cut method" -owe&er( this techni;ue is

;uite simpli!ied and is not accurate i! all the sources and uses o! !unds do not mo&e as a percent o! sales"

The !ormula must also $e adusted !or the successi&e accumulation o! earnings retained !rom pro!its i! a

!orecast longer than one year is $eing made"

)e know that a!ter the !act the sources o! !unds must e;ual the uses o! !unds" Any !orecastim$alance must $e co&ered $y the external !unds needed"

xternal3unds 3orecasted % 3orecasted6eeded ses .ources

4 ! the le&el o! interest $earing de$t on the pro!orma $alance sheet is not set( an iterati&e solution to the interestand de$t accounts is needed" 3irst( make a rough estimate o! the interest expense 'perhaps $ased on the prior year+ andcalculate net income" .econd( use the resulting net income to !orecast retained earnings and create the pro!orma $alancesheet including the si>e o! the loan" Third( go $ack to the pro!orma income statement and enter a $etter estimate o! interest"Then iterate $ack to the $alance sheet i! your !irst estimate o! interest was o!! the mark" The third and !ourth steps areexamples o! tying the pro!orma income statement to the pro!orma $alance sheet"


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Another way o! expressing this relationship is to associate the net sources and uses o! !unds with the!orecast change in assets( lia$ilities( and retained earnings" xpressed this way we ha&e

xternal 3orecasted 3orecasted 3orecasted3unds Change in % Change in % Change in

6eeded Baria$le Baria$le RetainedAssets #ia$ilities arnings

d)-(1Sp-SS

-S

S

A! 1

"

"

"

"

where we assume all current assets( net plant( and accounts paya$le &ary with sales and9

A0I.0 percentage relationship o! &aria$le assets to sales '4D"0P L220"2ILF1D+#0I.0 percentage relationship o! &aria$le lia$ilities to sales '7"DP L27"8ILF1D+

. change in dollar sales 'LF1 LFE0 % LF1D+d initial di&idend payout ratio '85"1P L7"DIL17"D+p net pro!it margin 'E"8P+.1 !orecast le&el o! sales 'LFE0+

nserting these num$ers !rom the hypothetical !irm into the ;uick and dirty e;uation yields9

xternal3unds "4D0'LF1+ % "07D'LF1+ % "0E8'LFE0+'1%"851+6eeded

L21"8 % L2"7 % 10

L7"4

The L7"4 does not match the L7"D plug !igure !ound using the !ull pro!orma $alance sheet $ecause the

;uick and dirty approach does not account !or details such as the purchase o! the new truck or the

payment to the sinking !und" This short%cut approach does not gi&e the rich details o! the !ull pro!orma in

Ta$les F and does not gi&e one much direction as to how the external !unds should $e raised"

Astute readers will notice that the ;uick and dirty !ormula is not new( $ut is a rearrangement o!

the sustaina$le growth !ormula presented in most corporate !inance text $ooks" .etting the external

!unds need e;ual to >ero 'no additional external !unds( only internally generated e;uity and a

proportionate amount o! de$t+ and sol&ing !or the growth rate o! sales yields9

d)-(1-A

Sp!

S

S

""

1

"


12/22

A!ter reali>ing that p times .1e;uals !orecasted net income and that A0% #0e;uals $eginning e;uity( the

a$o&e e;uation can $e stated as9

g R,'1%d+

or sustaina$le growth( g( e;uals the return on $eginning e;uity( R,( times the retention ratio 'one

minus the payout ratio+" Barious $usiness and text $ook authors !ormulate the sustaina$le growth ratio

in di!!erent ways( $ut this is the most parsimonious !ormulation and is &isually closest to the

approximation o!ten used in practice9 g R'1%d+"


13/22


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0"n t1ousnds2

ACC6T

TRA#3RCA.T

1DDD )I/#G 3GR

36A#3RCA.T

1DDD)IC6.TRA6T.

A..M/T6.A6H

CA#C#AT6.

CashAIRecei&a$len&entory Current Assets

17"EF7"885"F108"2

17"EF7"885"F108"2 Current ratio 1"2

6et /lant Total Assets

1FE"02FD"2

1FE"02FD"2 He$t ratio "84

AI/aya$le6I/aya$le Current #ia$"

F0"EE8"078"E

F0"EE4"F74"7

.ee 6ote 2

.ee 6ote 1

#TH Total #ia$"

1D"4108"1

2F"2110"0

.ee 6ote 8

.ee 6ote F

Common .tock F0"0 F0"0

RI Total #ia$ility and ;uity

D4"2

2F0"F

DD"2

2FD"2

.ee 6ote E

xternal 3in" Re;uired

7"D2FD"2

6otes91+ To stay within the current ratio constraint( current lia$ilities must $e L74"7"

C# CAI1"2 108"2I1"2 L74"7

2+ The current ratio constraint allows 6I/ to total only LE4"F !or an increase o! L2"F o&er the trial le&el"6I/ C# % AI/ 74"7 % F0"E LE4"F

F+ To stay within the de$t ratio constraint( total lia$ilities must $e L110"0"T# "84 TA "84 '2FD"2+ L110"0

8+ The total de$t constraint allows #TH to total only L2F"2 !or an increase o! LF"4 o&er the trial le&el"

#TH T# % C# 110"0 % 74"7 L2F"2

E+ The remainder o! the L7"D external !inancing must $e raised with e;uity which re;uires the di&idend to $e cut $yLF"0" Alternati&ely( the company could issue LF o! new stock in 1DDD"

RI TA % T# S C. so RI 2FD"2 % 110"0 % F0"0 LDD"2

T#$e 5Pro&orm Sttement o& Cs1 F$o6s

For t1e Yer End"n% Decem#er 4/7 /888


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0"n t1ousnds2

Cash !lows !rom operating acti&ities9 6et income 'pro!it a!ter taxes+ Adustment to determine cash !low9 Add $ack depreciation ncrease in accounts recei&a$le ncrease in in&entory ncrease in accounts paya$le Total adustments6et cash !lows !rom operating acti&ities

LF"0'0"7+'2"0+

2"1

L17"D

2"FL21"2

Cash !lows !rom in&esting acti&ities9 ncrease in plant and e;uipment6et cash !lows !rom in&esting acti&ities

'L14"0+'L14"0+

Cash !lows !rom !inancing acti&ities9 ncrease in notes paya$le ncrease in #TH 'less sinking !und+ Hi&idends paid6et cash !low !rom !inancing acti&ities3orecasted increase in cash

L2"F1"4

'E"D+'2"0+LF"2


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A99end"( A

Summry o& Re%ress"on Re$t"ons1"9s

)ithin xcel( the least s;uares regression line can $e !ound through the regression tool 'an

add%in that must $e loaded when the program is installed+ or through the graphing a$ilities" 3irst(

enter the sales data 'independent &aria$le+ in one column and the cash data 'dependent &aria$le+ in the

adoining column"

3or the regression approach( click on ?Tools(@ ?Hata Analysis(@ then select ?Regression"@

)hen prompted( input the range 'column o! cash data+( range 'column o! sales data+( and the

utput range 'pick the upper%le!t%hand corner o! any $lank area on the spreadsheet+( then click ?U"@

The spreadsheet will report( in the output range( many statistics including the slope and intercept o!

the line"

3or the graphic approach( create an ?'.catter+@ graph with cash on the &ertical axis and

sales on the hori>ontal axis" A!ter you ha&e the data on the graph( click on ?Chart@ then on ?Add a

Trend #ine@ and select the trend line option ?Hisplay e;uation on chart"@ The line along with its

e;uation will appear on your graph as is show in 3igure 1"

These two xcel approaches !ind the e;uation o! the line gi&en $y

#$!%

where the &aria$le to $e !orecast 'cash in this instance+ the independent &aria$le 'usually sales+V the intercept termW the slope term

and where the line is chosen to minimi>e the sum o! the s;uared errors '&ertical distances $etween the

data points and the line+" The intercept and slope can $e estimated !rom historical data using the

relationships9


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#-%!

#-#n

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!)#-#(

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i

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where

n the num$er o! historical data points 'F in this instance+

the a&erage o! i

the a&erage o! i


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A measure o! how well the e;uation !its the data is gi&en $y


19/22

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Figure 1 Regression

Cash = 0.05(Sales) + 0.93

R2= 0.68

0

2

4

6

8

10

12

14

16

18

20

0 50 100 150 200 250 300 35

Cash

($)


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Documents

R - Forecasting Financial Statements Aug01 - Clark McQueen