Exam 10: Forecasting Financial Statements

One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances. What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?

The first step in the forecasting game plan is to project sales and other other operating activities. Sales numbers are determined by both a volume component and price component. Projecting prices depends on factors specific to the firm and its industry that might affect demand and price elasticity. For the following types of firms discuss whether it would be likely that the firm would be able to raise future prices: a. A firm in a capital-intensive industry that is expected to operate near capacity for the near future. b. A firm in an inchustry that is expected to experience numerous technological improvements. c. A firm with products which are transitioning from the growth to maturity phase of the prochict life cycle. d. A firm that has established a well known brand name and image.

Techtronics is a leader in manufacturing computer chips, which is very capital-intensive. Because the production processes in computer chip manufacturing require sophisticated and rapidly changing technology, production and manufacturing assets in the chip industry tend to have relatively short useful lives. The following summary information relates to Techtronics' property, plant, and equipment for 2009 and 2010: $\begin{array}{|l|l|l|}\hline \text { Techtronics(amounts in millions) } & 2009 & 2010 \\\hline \text { Property, Plant, and Equipment, at cost } & \$ 46,052 & \$ 48,088 \\\hline \text { Accumulated Depreciation } & \$(29,134) & \$(30,544) \\\hline \text { Property, Plant, andEquipment, net } & \$ 16,918 & \$ 17,544 \\\hline \text { Depreciation Expense } & & \$ 4,360 \\\hline \text { Capital Expenditures, net } & & \$ 5,200 \\\hline & & \\\hline\end{array}$ Required Assume that Techtronics depreciates all property, plant, and equipment using the straight-line depreciation method and zero salvage value. Assume that Intel spends $6,000 on new depreciable assets in Year 1 and does not sell or retire any property, plant, and equipment during Year 1. a. Compute the average useful life that Techtronics used for depreciation in 2010. b. Project total depreciation expense for Year 1 using the following steps: (i) project depreciation expense for Year 1 on existing property, plant, and equipment at the end of 2010; (ii) project depreciation expense on capital expenditures in Year 1 assuming that Intel takes a full year of depreciation in the first year of service; and (iii) sum the results of (i) and (ii) to obtain total depreciation expense for Year 1. c. Project the Year 1 ending balance in property, plant, and equipment, both at cost and net of accumulated depreciation.

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forecasts of future growth in inventory will most likely affect growth in

Many times an analyst will compute ending accounts receivable or inventory balances using turnover ratios. Discuss the advantage and disadvantage of using this methodology.

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?

Card Sharks, Inc. sells baseball cards and other memorabilia. The company tries to maintain a cash balance equivalent to approximately 30 days of sales. Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 33% and in 2013 of 40%. - Given the information provided about Card Sharks, what is the company's 2012 projected year-end cash balance?

Repair Specialists is a leading retailer of home improvement products. It operates large warehouse-style stores. Despite declining sales and difficult economic conditions in 2009 and 2010, Repair Specialists continued to invest in new stores. The following table provides summary data for Repair Specialists. Repair Specialists 2009 2010 (amounts in millions except number of stores) Number of stores 2,234 2,274 Sales revenues \ 77,349 \ 71,288 Invertory \ 11,731 \ 10,673 Capital expencitures, net \ 3,558 \ 1,847 Required a. Use the preceding data for Repair Specialists to compute average revenues per store, capital spending per new store, and ending inventory per store in 2010. b. Assume that Repair Specialists will add 100 new stores by the end of Year 1. Use the data from 2010 to project Year 1 sales revenues, capital spending, and ending inventory. Assume that each new store will be open for business for an average of one-half year in Year 1. For simplicity, assume that in Year 1, Repair Specialists’ sales revenues will grow, but only because it will open new stores.

In comparison of 2010 to 2009 performance, Watson Company's inventory turnover decreased substantially, although sales and inventory amounts were essentially unchanged. Required: During a corporate meeting you heard the following managers postulate why the decreased inventory turnover ratio happened. Which statement best explains the decreased inventory turnover ratio and why? a. The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods sold. b. The operations manager said: The decreased inventory turnover ratio is due to increased gross profit percentage. c. The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts receivable turnover. d. The shipping manager said: The decreased inventory turnover ratio is due to decreased total asset turnover.

Financial statement forecasts should rely on _________________________ across financial statements.

Sparky's sells auto parts. Provided below is selected financial information from the company's 2012 annual report: Fiscal year end (amounts in thousands of dollass) Net sales \ 125,410 \ 106,380 Cost of GoodsSold -104,090 -89,359 GrossProfit \ 21,320 \ 17,021 Inventory \ 31,353 \ 30,850 - Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?

Financial ratio, percentage, and trend comparisons can be distorted by all of the following except:

Projected financial statements can be used to assess the sensitivity of all of the following except:

A firm in a mature industry with little expected change in its market share might anticipate volume increases equal to the growth rate in the _________________________ within its geographic markets.

For some types of assets, such as plant, property and equipment, asset growth typically ____________________ future sales growth.

A firm in transition from the high growth to the mature phase of its life cycle, or a firm with significant technological improvements in its production processes, might expect increases in ______________________________ but decreases in sales prices per unit.

For some types of assets, such as accounts receivable, asset growth typically ____________________ future sales growth.

Realistic expectations are ____________________ and ____________________.

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following companies would most likely not be able to increase prices in the near future?

Bargains, Inc. manufactures and markets toys. Selected income statement data from 2010 and 2009 appear below: Bưgains, Lnc. Selected Income Statement data Fiscal year end 12/31/2010 12/31/2009 (amounts in thousends of dollars) Net sales \ 4,885,340 \ 4,637,924 Cost of GoodsSold -3,824,353 -3,638,990 Grossprofit 1,060,987 998,934 Required: a. An analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost by dividing the amount of the change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply the variable cost percent age times sales to determine the total variable cost. Subtracting the variable cost yields the fixed cost for that paticular item. Follow this procechure to determine the cost structure for costs of goods sold for Bargains, Inc. b. Bargains, Inc. projects salesto grow at the following percentagesin future years: 2011, 9 percent, 2012, 11 percent; 2013, 15 percent. Using this information project sales, cost of goods sold and gross profit for Bargains, Inc. for 2011 to 2013.