1. 1 of 38 ©2012 McGraw-Hill Ryerson Limited Learning Objectives 1.Explain why financial forecasting is essential for the healthy growth of the firm. (LO1) 2.Prepare the four financial statements for forecasting. (LO2) i.The pro forma income statement ii.The pro forma statement of retained earnings iii.The cash budget iv.The pro forma balance sheet 3.Perform the specific accounts method and the percent-of-sales method for forecasting on a less precise basis. (LO3)

2. 2 of 38 ©2012 McGraw-Hill Ryerson Limited Pro Forma Income Statement Provides a projection of how much profit the firm anticipates making over the ensuing time period Involves the following 4 steps: 1.establishing a sales projection 2.determining a production (or purchase) schedule and the associated use of new material, direct labor and overhead to arrive at gross profit 3.computing other expenses 4.determining the profit LO3

3. 3 of 38 ©2012 McGraw-Hill Ryerson Limited Basis for Sales Projections External Factors Recession or boom? Export sales? Consumer spending? Competition? New technology? etc. Internal Factors New product lines? Turnover in people? Profit targets? Employee training? Price changes? etc. LO3

4. 4 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-1 Projected wheel and caster sales (first six months, 2012) LO3

5. 5 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-2 Stock of beginning inventory LO3

6. 6 of 38 ©2012 McGraw-Hill Ryerson Limited Production (or Purchases) Schedule Projected sales (in Units or $) PLUS Desired ending inventory MINUS Beginning inventory EQUALS Production (or Purchases) LO3

7. 7 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-3 Production requirements for six months LO3

8. 8 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-4 Unit costs LO3

9. 9 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-5 Total production costs LO3

10. 10 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-6 Allocation of manufacturing cost and determination of gross profits LO3

11. 11 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-7 Value of ending inventory LO3

12. 12 of 38 ©2012 McGraw-Hill Ryerson Limited Pro Forma Balance Sheet Shows the anticipated cumulative changes in a firm’s asset holdings and liabilities and equity account over the next time period Is constructed from the prior period’s balance sheet and pro forma income statement and the cash budget LO3

13. 13 of 38 ©2012 McGraw-Hill Ryerson Limited Figure 4-2 Development of a pro forma balance sheet LO3

14. 14 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-17 Pro Forma Balance Sheet (ASPE format) Pro Forma Balance Sheet June 30, 2013 Assets Current assets: 1.Cash............$ 5,000 2.Marketable securities.......3,200 3.Accounts receivable........16,000 4.Inventory...........6,200 Total current assets......30,400 5.Plant and equipment.......45,740 Total assets...........$76,140 Liabilities and Shareholders' Equity 6.Accounts payable........$ 5,732 7.Notes payable.........5,884 8.Long-term debt.........15,000 9.Common stock.........10,500 10.Retained earnings........39,024 Total liabilities and shareholders' equity..$76,140 LO3

15. 15 of 38 ©2012 McGraw-Hill Ryerson Limited Percent-of-Sales Method A short-cut, less exact, easier method of determining financing needs (The “quick and dirty” approach) Assumes that B/S accounts will maintain a constant percentage relationship to sales More sales will mean more assets which will require more financing Can be summarized by using the Required New Funding formula LO3

16. 16 of 38 ©2012 McGraw-Hill Ryerson Limited Table 4-18 Percent –of-sales table LO3