华中科技大学：《财务报表分析》（英文版）CHAPTER 10 Prospective Analysis

Prospective Analysis 10 CHAPTER

10 CHAPTER Prospective Analysis

Short-Term Forecasting Objective and Users Main objective is analysis of liquidity Sufficient cash to effectively operate Ability to service short-term debt Liquidity is of interest to both internal and external users Managers(cash for operations) Creditors(loan safeguards) Investors (return implications) Auditors(going concern analysis) Numerous others

Short-Term Forecasting Objective and Users Main objective is analysis of liquidity - Sufficient cash to effectively operate - Ability to service short-term debt Liquidity is of interest to both internal and external users - Managers (cash for operations) - Creditors (loan safeguards) - Investors (return implications) - Auditors (going concern analysis) - Numerous others…

Short-Term Forecasting Cash Flow Relations Basic facts: Cash refers to cash and cash equivalents Cash is the most liquid of assets Nearly all transactions have an immediate or eventual impact on cash Some users consider receivables and inventories liquid assets given their nearness to cash

Short-Term Forecasting Cash Flow Relations Basic facts: - Cash refers to cash and cash equivalents - Cash is the most liquid of assets - Nearly all transactions have an immediate or eventual impact on cash - Some users consider receivables and inventories liquid assets given their nearness to cash

Short-Term Forecasting Cash Flow Relations Cash inflows and out flows are interrelated Cash flows are related to accruals and income Cash flows are subjected to managerial discretion Sales is the driver of operating cash flows Cash forecasts depends on the quality of the sales forecast Most cash flows relate to and depend on sales

Short-Term Forecasting Cash Flow Relations Cash inflows and out flows are interrelated Cash flows are related to accruals and income Cash flows are subjected to managerial discretion Sales is the driver of operating cash flows - Cash forecasts depends on the quality of the sales forecast - Most cash flows relate to and depend on sales 1 4 2 3

Short-Term Forecasting Forecasting sales Sales forecasting requires analysis of: Directions and trends in sales Market share Industry and economic conditions Productive and financial capacity Competitive factors

Sales forecasting requires analysis of: Directions and trends in sales Market share Industry and economic conditions Productive and financial capacity Competitive factors Short-Term Forecasting Forecasting Sales

Short-Term Forecasting Pro Forma Analysis Objectives: Verifies reasonableness of short-term forecasts Assesses feasibility of short-term forecasts

Objectives: ➢ Verifies reasonableness of short-term forecasts ➢ Assesses feasibility of short-term forecasts Short-Term Forecasting Pro Forma Analysis

Short-Term Forecasting Pro Forma Analysis Focus on construction of pro forma financial statements Prepare pro forma income statement Prepare pro forma balance sheet Financial ratios derived from pro forma statements Assess pro forma ratios for reasonableness and feasibility Compare key relations to past relations y Unexpected variations must be reviewed for possible revisions

Focus on construction of pro forma financial statements - Prepare pro forma income statement - Prepare pro forma balance sheet - Financial ratios derived from pro forma statements - Assess pro forma ratios for reasonableness and feasibility - Compare key relations to past relations - Unexpected variations must be reviewed for possible revisions Short-Term Forecasting Pro Forma Analysis

Short-Term Forecasting Pro Forma Analysis-lllustration Estimates of sales and Cash Collections For Months January-June, Year 1 January February March April May June Sales $100,000$125,000$150,000$175,000$200,000$250,000 Collections of sales: 1 st month40%$40,000$50,000$60,000$70,000$80,000$100,000 2nd month% 30,00037,50045,00052,50060,000 3rd month -% 20,00025,00030,00035,000 4th month% 5,0006,2507,500 Total cash collections $40,000$80,000$117,500$145,000$168,750$202,500 Vrite-offs--5% 5,0006,2507,500

Short-Term Forecasting Pro Forma Analysis--Illustration Estimates of Sales and Cash Collections For Months January–June, Year 1 January February March April May June Sales $100,000 $125,000 $150,000 $175,000 $200,000 $250,000 Collections of sales: 1st month—40% $ 40,000 $ 50,000 $ 60,000 $ 70,000 $ 80,000 $100,000 2nd month—30% 30,000 37,500 45,000 52,500 60,000 3rd month—20% 20,000 25,000 30,000 35,000 4th month—5% 5,000 6,250 7,500 Total cash collections $ 40,000 $ 80,000 $117,500 $145,000 $168,750 $ 202,500 Write-offs—5% 5,000 6,250 7,500

Short-Term Forecasting Pro Forma Analysis-lllustration Expense Estimates For Months January-June, Year 1 Materials 6O% of sales Labor .5% of sales Manufacturing overhead Variable 10% of sales Fixed $8, 000 per month (includes $1,000 depreciation per month) Selling expenses 10% of sales General and administrative expenses Variable 8% of sales Fixed $7,000 per month

Short-Term Forecasting Pro Forma Analysis--Illustration Expense Estimates For Months January–June, Year 1 Materials 30% of sales Labor 25% of sales Manufacturing overhead: Variable 10% of sales Fixed $8,000 per month (includes $1,000 depreciation per month) Selling expenses 10% of sales: General and administrative expenses: Variable 8% of sales Fixed $7,000 per month

Short-Term Forecasting Pro Forma Analysis-lllustration Estimates of Material purchases and cash payments For Months January-June, Year 1 anuary February March April May June Materials purchases $40,000$38,000$43,000$56,000$58,000$79,000 Payments 1 st month-50%$20,000$19,000$21,500$28,000$29,000$39,500 2 nd month-50%20,00019,00021,50028,00029,000 Total payments$20,000$39,000$40,500$49,500$57,000$68,500 These reconcile with material costs and changes in inventories

Short-Term Forecasting Pro Forma Analysis--Illustration Estimates of Material Purchases and Cash Payments For Months January–June, Year 1 January February March April May June Materials purchases* $ 40,000 $ 38,000 $ 43,000 $ 56,000 $ 58,000 $ 79,000 Payments: 1st month—50% $ 20,000 $ 19,000 $ 21,500 $ 28,000 $ 29,000 $ 39,500 2nd month—50% 20,000 19,000 21,500 28,000 29,000 Total payments $ 20,000 $ 39,000 $ 40,500 $ 49,500 $ 57,000 $ 68,500 *These reconcile with material costs and changes in inventories