Exam 10: Forecasting Financial Statements

The following balance sheet and income statement pertain to Goode Corp.,using the following assumptions complete a forecasted 2013 income statement: A55mmptians far 2013: Revenue growth rate 45\% COGS 70\% of 5 ales Operating expenses 18\% of sales Interest expense 12\% of begining lang-term debt Tar rate

A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.

The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.

Card Sharks, Inc. 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 30% and in 2013 of 35%. -Given the information provided about Card Sharks,what is the company's 2012 projected year-end cash balance?

All of the following are the fundamental bases for future payoffs to equity shareholders and share value except:

It may be difficult to forecast sales for firms with _________________________ patterns because their historical growth rates reflect wide variations in both direction and amount from year to year.

Using common-size balance sheet percentages to project individual assets,liabilities,or shareholders' equity has all of the following shortcomings except:

An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that

Benson sells books through retail stores and on the Web.For a retailer like Benson,inventory is a critical element of the business and it is necessary to carry a wide array of titles.In 2010,sales totaled $5,122 million and cost of sales and occupancy totaled $3,541 million.Inventories constitute the largest asset on Benson's balance sheet,totaling $1,203 million at the end of 2010 and $1,358 million at the end of 2009. Required: a.Compute the inventory turnover ratio for Benson for 2010. b.Over the last two years,the number of Benson retail stores has remained fairly steady and sales have grown at a compounded annual rate of 11.6 percent.Assume that the number of stores will remain constant and that sales will continue to grow at an annual rate of 11.6 percent each year between Year +1 and Year +5.Also assume that the future cost of goods sold to sales percentage will equal that realized in 2010 (which is very similar to the cost of goods sold percentage over the past three years).Project the amount of inventory at the end of Year +1 through Year +5 using the inventory turnover ratio computed in Part a.Also compute the percentage change in inventories between each of the year-ends between 2010 and Year +5.Does the pattern of growth in your projections of Benson inventory seem reasonable to you considering the assumptions of smooth growth in sales and steady cost of goods sold percentages? Explain. c.The changes in inventories in Part b display the sawtooth pattern depicted in Exhibit 10.5 of the text.Smooth the changes in the inventory forecasts between 2010 and Year +5 using the compound annual growth rate in inventories between the end of 2010 and the end of Year +5 implied by the projections in Part b.Does this pattern of growth seem more reasonable? Explain. d.Now suppose that instead of following the smoothing approach in Part c,you used the rate of growth in inventory during 2010 to project future inventory balances at the end of Year +1 through Year +5.Use these projections to compute the implied inventory turnover rates.Does this pattern of growth and efficiency in inventory for Benson seem reasonable? Explain.

Sparky's Sparky's sells auto parts. Provided below is selected financial information from the company's 2012 annual report: $\text { Sparky's Selected Financial Statement data }$ Fiscalyear end 2012 2011 (amounts in thousands of dollars) Net sales \ 125,410 \ 106,380 Cost of Goods Sold -104,090 - Grass Prafit \ 21,320 \ 17,021 Irventory \ 31,353 \ 30,850 -Using Sparky's financial information what is the company's inventory turnover ratio for 2012?

When projecting ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.

Bargains, Inc. Selected Income Statement data Fiscal year end (amounts in thousands of dollars) Net sales \ 5,320,185 \ 4,980,000 Cost of Goods Sold -3,520,415 -3,340,290 Gross profit \ 1,799,770 \ 1,369,710 998,934 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 percentage times sales to determine the total variable cost.Subtracting the variable cost yields the fixed cost for that particular item.Follow this procedure to determine the cost structure for costs of goods sold for Bargains,Inc. b.Bargains,Inc.projects sales to grow at the following percentages in future years: 2011,10percent;2012,12 percent;2013,16 percent.Using this information project sales,cost of goods sold and gross profit for Bargains,Inc.for 2011 to 2013.

If a firm operates at less then full capacity then price _______________________ are not likely

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 toinventory being shipped FOB destination point which keeps those items in inventory until they reach the purchasers warehouse.

All of the following are true regarding projected financial statements except:

As a firm progresses through the introduction life-cycle stage,what type of flexible account will it be more likely to use to balance the balance sheet?

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

As an analyst it is important when projecting sales to make estimates about future changes in sales volume.Compare how you might make estimates about future sales value for a company in a mature industry and one in a rapidly growing industry.

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.

Hart designs,manufactures,and markets toys in domestic and international markets.Sales during 2010 totaled $4,022 million.Accounts receivable totaled $655 million at the beginning of 2010 and $612 million at the end of 2010. Required: a.Use the average balance to compute the accounts receivable turnover ratio for Hart for 2010. b.Hart generated a compound annual sales growth rate of 13.0 percent over the past two years.Assume that Hart's sales will continue to grow at that rate each year for Year +1 through Year +5 and that the accounts receivable turnover ratio each year will equal the ratio computed in requirement a.for 2010.Project the amount of accounts receivable at year-end through Year +5 based on the accounts receivable turnover computed in requirement a.Also compute the percentage change in accounts receivable between each of the year-ends through Year +5. c.Does the pattern of growth in your projections of Hart's accounts receivable seem reasonable considering the assumptions of smooth growth in sales and steady turnover? Explain. d.The changes in accounts receivable computed in requirement b.display the sawtooth pattern depicted in Exhibit 10.5 in the text.Smooth the changes in accounts receivable by computing the year-end accounts receivable balances for Year 1 through Year 5 using the compound annual growth rate in accounts receivable between the end of 2010 and the end of Year +1 from requirement b. e.Smooth the changes in accounts receivable using the compound annual growth rate in accounts receivable between the end of 2010 and the end of Year +4 from requirement b.Apply this growth rate to compute accounts receivable at the end of Year +1 through Year +5.Why do the amounts for ending accounts receivable using the growth rate from requirement d.differ from those using the growth rate from this requirement? f.Compute the accounts receivable turnover for 2010 by dividing sales by the balance in accounts receivable at the end of 2010 (instead of using average accounts receivable as in requirement a).Use this accounts receivable turnover ratio to compute the projected balance in accounts receivable at the end of Year +1 through Year +5.Also compute the percentage change in accounts receivable between the year-ends for Year +1 through Year +5.