RESOURCES NEEDED FOR WK 4 ASSIGNMENT1. httpguides.library.c.docx

RESOURCES NEEDED FOR WK 4 ASSIGNMENT
1. http://guides.library.cornell.edu/scholarlyjournals
2. http://naepub.com/reporting-research/2016-26-3-3/
3. https://nursingeducationexpert.com/critical-appraisal/
4.
https://academicguides.waldenu.edu/foundationscoursedocs/Intr
oToTheWaldenLibrary
5.
https://academicguides.waldenu.edu/foundationscoursedocs/Sear
chingRetrieving
6.
https://academicguides.waldenu.edu/foundationscoursedocs/Iden
tifyingEvaluating
7. https://academicguides.waldenu.edu/writingcenter/home
8. https://academicguides.waldenu.edu/library/subject/nursing
9.
https://academicguides.waldenu.edu/writingcenter/webinars/tech
nical
Pls, There should be introduction and conclusion in each paper.
Template to use
Week 4 | Part 4: Research Analysis

I have identified one topic of interest for further study. I have
researched and identified one peer-reviewed research article
focused on this topic and have analyzed this article. The results
of these efforts are shared below.
Directions: Complete Step 1 by using the table and subsequent
space below identify and analyze the research article you have
selected. Complete Step 2 by summarizing in 2-3 paragraphs the
results of your analysis using the space identified.
Step 1: Research Analysis
Complete the table below
Topic of Interest:
Research Article:Include full citation in APA format, as well as
link or search details (such as DOI)
Professional Practice Use:
One or more professional practice uses of the theories/concepts
presented in the article
Research Analysis Matrix
Add more rows if necessary
Strengths of the Research
Limitations of the Research
Relevancy to Topic of Interest
Notes

Step 2: Summary of Analysis
Craft a summary (2-3 paragraph) below that includes the
following:
· Describe your approach to identifying and analyzing peer-
reviewed research
· Identify at least two strategies that you would use that you
found to be effective in finding peer-reviewed research
· Identify at least one resource you intend to use in the future to
find peer-reviewed research

RUBRIC for Assignment wk 4
Excellent
Good
Fair
Poor
Using the Week 4 Part 4 section of your Academic Success and
Professional Development Plan Template presented in the
Resources, conduct an analysis of the elements of the research
article you identified. Be sure to include the following:
· The topic of interest you have selected.
· Correctly formatted APA citation of the article you selected,
along with link or search details.
· Identify a professional practice use of the theories/concepts
presented in the article.
18 (18%) - 20 (20%)
The response clearly identifies the topic of interest selected.
The response accurately and completely provides a citation of
the article selected, including an accurate and complete link or
thorough search details.
The response clearly identifies and describes in detail a
professional practice use of the theories/concepts presented in
the article.
16 (16%) - 17 (17%)
The response partially identifies the topic of interest selected.
The response provides a partial citation of the article selected,
including a partial link or search details.
The response partially identifies and describes a professional
practice use of the theories/concepts presented in the article.

14 (14%) - 15 (15%)
The response vaguely identifies the topic of interest selected.
The response vaguely or inaccurately provides a citation of the
article selected, including vague or inaccurate search details.
The response vaguely or inaccurately identifies and describes a
professional practice use of the theories/concepts presented in
the article.
0 (0%) - 13 (13%)
The response vaguely and inaccurately identifies the topic of
interest selected, or is missing.
The response vaguely and inaccurately provides a citation of the
article selected, including vague and inaccurate search details,
or is missing.
The response vaguely and inaccurately identifies and describes
a professional practice use of the theories/concepts presented in
the article, or is missing.
Analysis of the article using the Research Analysis Matrix
section of the template.
· Write a one-paragraph justification explaining whether or not
you would recommend the use of this article to inform
professional practice.
18 (18%) - 20 (20%)
The response clearly and accurately provides a detailed analysis
of the article using the Research Analysis Matrix section of the
template.
The response clearly and accurately explains in detail the
justification of whether or not to recommend the use of the
article to inform professional practice.
16 (16%) - 17 (17%)
The response provides a partial analysis of the article using the

Research Analysis Matrix section of the template.
The response partially explains the justification of whether or
not to recommend the use of the article to inform professional
practice.
14 (14%) - 15 (15%)
The response provides a vague or inaccurate analysis of the
article using the Research Analysis Matrix section of the
template.
The response vaguely or inaccurately explains the justification
of whether or not to recommend the use of the article to inform
professional practice.
0 (0%) - 13 (13%)
The response provides a vague and inaccurate analysis of the
article using the Research Analysis Matrix section of the
template, or is missing.
The response vaguely and inaccurately explains the justification
of whether or not to recommend the use of the article to inform
professional practice, or is missing.
Write a 2-3 paragraph summary that you will add to your
Academic Success and Professional Development Plan that
includes the following:
· Describe your approach to identifying and analyzing peer-
reviewed research.
· Identify at least two strategies that you would use that you
found to be effective in finding peer-reviewed research.
· Identify at least one resource you intend to use in the future
to find peer-reviewed research.
41 (41%) - 45 (45%)
The response clearly and accurately describes in detail the
approach to identifying and analyzing peer-reviewed research.
The response clearly identifies and accurately describes in

detail at least two strategies used to be effective in finding
peer-reviewed research.
The response provides a complete, detailed, and specific
synthesis of at least one outside resource that may be used in
the future to find peer-reviewed research. The response fully
integrates at least 1 outside resource and 2-3 course specific
resources that fully supports the summary provided.
36 (36%) - 40 (40%)
The response partially describes the approach to identifying and
analyzing peer-reviewed research.
The response partially identifies and describes at least two
strategies used to be effective in finding peer-reviewed
research.
The response provides an accurate synthesis of at least one
outside resource that may be used in the future to find peer-
reviewed research. The response integrates at least 1 outside
resource and 2-3 course specific resources that support the
summary provided.
32 (32%) - 35 (35%)
The response vaguely or inaccurately describes the approach to
identifying and analyzing peer-reviewed research.
The response vaguely or inaccurately identifies and describes at
least two strategies used to be effective in finding peer-
reviewed research.
The response vaguely or inaccurately synthesizes at least one
outside resource that may be used in the future to find peer-
reviewed research. The response minimally integrates resources
that may support the summary provided.
0 (0%) - 31 (31%)
The response vaguely and inaccurately describes the approach
to identifying and analyzing peer-reviewed research, or is

missing.
The response vaguely and inaccurately identifies and describes
at least two strategies used to be effective in finding peer-
reviewed research, or is missing.
The response fails to integrate any resources that may be used
in the future to find peer-reviewed research to support the
summary provided, or is missing.
Written Expression and Formatting - Paragraph Development
and Organization:
Paragraphs make clear points that support well developed ideas,
flow logically, and demonstrate continuity of ideas. Sentences
are carefully focused--neither long and rambling nor short and
lacking substance. A clear and comprehensive purpose
statement and introduction is provided which delineates all
required criteria.
5 (5%) - 5 (5%)
Paragraphs and sentences follow writing standards for flow,
continuity, and clarity.
A clear and comprehensive purpose statement, introduction, and
conclusion is provided which delineates all required criteria.
4 (4%) - 4 (4%)
continuity, and clarity 80% of the time.
Purpose, introduction, and conclusion of the assignment is
stated, yet is brief and not descriptive.
3.5 (3.5%) - 3.5 (3.5%)
continuity, and clarity 60%- 79% of the time.
Purpose, introduction, and conclusion of the assignment is
vague or off topic.

0 (0%) - 3 (3%)
continuity, and clarity < 60% of the time.
No purpose statement, introduction, or conclusion was provided.
Written Expression and Formatting - English writing standards:
Correct grammar, mechanics, and proper punctuation
5 (5%) - 5 (5%)
Uses correct grammar, spelling, and punctuation with no errors.
4 (4%) - 4 (4%)
Contains a few (1-2) grammar, spelling, and punctuation errors.
3.5 (3.5%) - 3.5 (3.5%)
Contains several (3-4) grammar, spelling, and punctuation
errors.
0 (0%) - 3 (3%)
Contains many (≥ 5) grammar, spelling, and punctuation errors
that interfere with the reader’s understanding.
Written Expression and Formatting - The paper follows correct
APA format for title page, headings, font, spacing, margins,
indentations, page numbers, running head, parenthetical/in-text
citations, and reference list.
5 (5%) - 5 (5%)
Uses correct APA format with no errors.
4 (4%) - 4 (4%)
Contains a few (1-2) APA format errors.
3.5 (3.5%) - 3.5 (3.5%)
Contains several (3-4) APA format errors.
0 (0%) - 3 (3%)
Contains many (≥ 5) APA format errors.
Total Points: 100
Name: NURS_6002_Week_4_Assignment_Rubric
Assignment WK 4
Research Analysis

Architect Daniel Libeskind is credited with saying “To provide
meaningful architecture is not to parody history, but to
articulate it.” The suggestion is that his work does not copy the
efforts of others but relies on it.
Understanding the work of others is critically important to new
work. Contributions to the nursing body of knowledge can
happen when you are able to analyze and articulate the efforts
of previous research. Hence research analysis skills are critical
tools for your toolbox.
In this Assignment, you will locate relevant existing research.
You also will analyze this research using a tool helpful for
analysis.
To Prepare:
Reflect on the strategies presented in the Resources this week in
support of locating and analyzing research.
Use the Walden Library to identify and read one peer-reviewed
research article focused on a topic of interest to you in your
specialty field.
Review the article you selected and reflect on the professional
practice use of theories/concepts as described by the article
The Assignment:
Using the ‘Week 4 | Part 4’ section of your Academic Success
and Professional Development Plan Template presented in the
Resources, conduct an analysis of the elements of the research
article you identified. Be sure to include the following:
The topic of interest you have selected
Correctly formatted APA citation of the article you selected,
along with link or search details
Identify a professional practice use of the theories/concepts
presented in the article.

Analysis of the article using the Research Analysis Matrix
section of the template
Write a 1-paragraph justification explaining whether or not you
would recommend the use of this article to inform professional
practice
Write a 2- to 3-paragraph summary that you will add to your
Academic Success and Professional Development Plan that
includes the following:
Describe your approach to identifying and analyzing peer-
reviewed research
Identify at least two strategies that you would use that you
found to be effective in finding peer-reviewed research
Identify at least one resource you intend to use in the future to
find peer-reviewed research
Note: Add your work for this Assignment to the original
document you began in the Week 1 Assignment, which was built
off the Academic Success and Professional Development Plan
Tem
Learning Objectives
Upon completion of Chapter 3, you will be able to:
• Construct a pro forma income statement using the percent of
sales method.
• Construct a pro forma balance sheet.
• Complete a cash budget.
Financial Forecasting
3

Polka Dot/Thinkstock
byr80656_03_c03_043-076.indd 43 3/28/13 3:21 PM
CHAPTER 3Introduction
Financial management is forward-looking. Financial decisions
almost always require predicting how the decision will affect
the future value of the firm. There-fore, we need to have tools
that will help us forecast the financial performance and
financial position of the company. In this chapter we introduce
two financial forecasting
tools—pro forma (or projected) financial statements and the
cash budget. Pro forma
statements use the basic format of accounting statements to
make financial forecasts.
These projected (or pro forma) financial statements will be
important as you progress
through this textbook. The cash budget is similar to the register
in your checkbook.
It records cash receipts and outlays, and then shows when the
company will have a
cash surplus or a cash deficit. A cash surplus is cash in excess
of the minimum amount
required to keep the business operating on a day-to-day basis.
As the feature box that
follows illustrates, the cost of a cash surplus is great. Efficient
firms invest this surplus
to earn interest income. A cash deficit requires the company to
arrange the appropriate
amount and timing of funding through a credit line or short-
term bank loan. Forecast-
ing is necessary if a company is going to effectively invest its
surplus cash or arrange for

appropriate financing to cover deficits.
Financial forecasting tools are not limited to predicting cash
surpluses or shortages. They
are much more versatile than that. These tools can be used to try
out new policies and
strategies before implementing them. By forecasting the
financial impact of a new prod-
uct, strategy, or policy before implementing it, a company can
avoid costly mistakes.
Moreover, forecasting helps show managers what steps need to
be taken to help make the
new plans or policies successful. Financial forecasting is an
important part of the corpo-
rate planning process. The tools introduced in this chapter will
be valuable as you pursue
your business career.
All companies should do financial forecasting, but it is
particularly important for small,
fast-growing companies with limited cash reserves. In the Web
Resources at the end of
Chapter 2, we list a New York Times article about why small
firms fail. The top 10 rea-
sons include too much growth, lack of a cash cushion, and poor
accounting. This chapter
introduces some tools that will help you avoid those three
problems. Without some idea
of where a company is heading financially, it is impossible to
choose policies, plan new
products, or determine how much to grow.
Much of this chapter is about collecting, organizing, analyzing,
and interpreting data. As
you go through the chapter, think about where in a company the
data might come from.

For example, sales growth estimates require input from sales
and marketing departments
and may need to be modified based on economic information.
Costs can come from many
places in an organization—human resources, production,
marketing, etc. We hope that
as you progress through this textbook you will see that financial
management doesn’t
operate in a vacuum. It is woven into the fabric of the entire
company and relies on other
departments as much as those areas rely on finance. Financial
forecasting may depend
more than most other finance topics on an interchange between
functional areas, but we
should always be aware that we are part of a larger team, and
we all need each other.
byr80656_03_c03_043-076.indd 44 3/28/13 3:21 PM
CHAPTER 3Section 3.1 Constructing Pro Forma Financial
Statements
3.1 Constructing Pro Forma Financial Statements
Pro forma financial statements (or projected finance statements)
are powerful tools for the financial manager or analyst. They
help the financial manager forecast how changes in policies will
affect the company’s financial situation. For example, how
will changing a company’s credit policy change the size of its
short-term bank loan?
One of our students who became an investment banker doing
leveraged buyouts of
companies says that he used pro forma statements more than any
other financial tool. In

this section we first show the mechanics of creating a pro forma
income statement and
balance sheet, and then we discuss where an analyst would get
the information required
for these statements.
A Closer Look: The Cost of Holding Too Much Cash
As odd as it sounds, having too much cash can be a problem.
Why?
Poor use of resources: In most firms cash keeps things
going but does not add to earnings. Companies make
money by investing their cash in whatever product or
service they sell. Holding large cash balances (i.e., more
than is needed to carry out the day-to-day transactions of
the company) means that part of a company’s resources
are not being used efficiently. One of the authors of this
textbook has a relative who keeps a large part of his sav-
ings (about $10,000) in a coffee can buried in his garden.
He has done this for years, occasionally adding some
money, sometimes raiding the can when he needs some
cash. Over the past 10 years that money has earned
nothing, while the stock market (the Dow Jones Indus-
trial Average) has gone from 3,000 to over 11,000—a
250% increase. Even a bank account paying 5% would
have grown by 60% or 70% over that period. Having cash sit
around is a waste. It needs to be put to
work. If a company does not have good investment
opportunities, the cash should be distributed to
shareholders so they can invest it.
Agency costs: A prominent financial economist, Michael
Jensen, has argued that when companies
have too much cash, managers tend to make poor decisions. His
theory is that most managers want

to run a large company. The bigger the company, the higher
their pay, the more colleagues they can
promote (and thereby the more loyalty they earn), the more
prestige they attain, and so on. Excess
cash (which he calls free cash flow) lets managers grow their
companies without much monitoring to
assure the growth makes sense. Jensen cited examples of
companies with excess cash that entered
markets they knew nothing about, made acquisitions that were
later reversed, or used the cash to
buy fancy offices, private jets, and other executive perks. He
called such wasteful or misdirected
spending agency costs of free cash flow to recognize that the
source of the waste was often having
too much cash on hand. (continued)
iStockphoto/Thinkstock
Keeping too much cash on hand can
actually cause problems for companies.
byr80656_03_c03_043-076.indd 45 3/28/13 3:21 PM
Statements
A Closer Look: The Cost of Holding Too Much Cash
(continued)
In July of 1999, the New York Society of Security Analysts
(NYSSA) began studying how companies
could enhance shareholder value. One of their first projects was
an evaluation of National Presto, a
housewares manufacturing company with headquarters in Eau

Claire, Wisconsin. One of the NYSSA
committee’s concerns was that National Presto held too much
cash: 80% of its assets were in cash or
cash equivalents. The committee’s analysts recommend paying a
large cash dividend or using the cash
to make an acquisition that would contribute to earnings. As it
stands, cash and cash equivalents earn
a very low return, especially when compared to the rise in the
stock market over the last several years.
The Income Statement
A standard method for constructing pro forma income
statements is to use historical per-
cent of sales for many categories, supplementing with additional
information when it is
available. The approach is as follows:
a. Obtain next year’s projected sales or the estimated sales
growth for the coming
year.
b. Compute cost of goods sold, as a percent of sales based on
historical data. If
information is available about possible changes in the cost
structure, this can be
used to modify the estimate.
c. Compute gross margin (sales minus cost of goods sold).
d. Determine general, administrative, and sales expense;
depreciation expense; and
other expenses, based on historical patterns from previous
years, or cost estimates
from other departments.

e. Compute taxable income by subtracting the expenses in (d)
from the gross margin.
f. Compute taxes using the companywide rate or rates from tax
tables, then
subtract taxes from taxable income to arrive at net income.
Pro Forma Income Statement Example
We will use the ACME Inc. income statements for 2011 and
2012 to construct a pro forma
income statement for 2013 based on some assumptions about
how the business will per-
form during 2013. The historical income statements for the
company are given in Table
3.1. Here are our assumptions for 2013:
• Sales will increase by 10% in 2013 from 2012 levels.
• COGS and SG&A will be the average percent of sales for the
last 2 years.
• Depreciation expense will increase to $1,800.
• Interest expense will be $840.
• The tax rate is 25%.
• Dividend payout will remain at $650.
byr80656_03_c03_043-076.indd 46 3/28/13 3:21 PM
Statements
Table 3.1: ACME Inc. actual income statements
2011 2012
Revenue 45,000 48,000

COGS 32,400 34,560
Gross margin 12,600 13,440
SG&A expense 5,850 6,240
Depreciation expense 1,500 1,600
EBIT 5,250 5,600
Interest expense 750 800
Taxable income 4,500 4,800
Taxes 1,125 1,200
Net income 3,375 3,600
Dividends 600 650
To retained earnings 2,775 2,950
Sales will increase by 10% in 2013, so 1.10 3 $48,000 5
$52,800.
In 2011 and 2012 COGS values were 72% of sales. We will
assume that COGS remains 72%
of sales in 2013. SG&A expense was 13% of sales in both 2011
and 2012, so we will use that
percent of sales in 2013. We have the information we need to
begin building the pro forma
income statement, as shown in Table 3.2.
Table 3.2

2011 (Actual) 2012 (Actual) 2013 (Projected) Source
Revenue 45,000 48,000 52,800 10% growth
COGS 32,400 34,560 38,016 72% of sales
Gross margin 12,600 13,440 14,784 Subtraction
SG&A expense 5,850 6,240 6,864 13% of sales
Depreciation
expense
1,500 1,600 1,800 Given
EBIT 5,250 5,600 6,120 Subtraction
Interest expense 750 800 840 Given
Taxable income 4,500 4,800 5,280 Subtraction
Taxes 1,125 1,200 1,320 25% of taxable
income
Net income 3,375 3,600 3,960 Subtraction
Dividends 600 650 650 Given
To retained earnings 2,775 2,950 3,310 Subtraction
byr80656_03_c03_043-076.indd 47 3/28/13 3:21 PM
Statements

Starting with sales, we enter the information we have, subtract
items to get gross mar-
gin, EBIT, and taxable income. We compute taxes at 25% and
subtract them from taxable
income to get net income. We subtract dividends from net
income to determine how much
money will be reinvested in the firm by adding it to retained
earnings on the balance
sheet. Notice that if the company wanted to retain more money
for reinvestment on behalf
of shareholders, it could do so by reducing dividends. This
shows the two ways that
shareholders earn a return on their investment: dividend
payments and company growth
through investment of earnings.
The Balance Sheet
Pro forma or projected balance sheets are often useful when
analyzing the effect of cor-
porate decisions on the company’s financial condition. One of
the most common uses for
a pro forma balance sheet is estimating future financial need, so
a company can make
arrangements for loans or lines of credit.
Before a balance sheet can be constructed, the appropriate pro
forma income statement
must already be completed. Constructing a simple pro forma
balance sheet usually
requires four steps:
Step 1: Fill in all of the values that don’t change, are known, or
that change in a definite
manner. These include items such as long-term debt and the

common stock accounts.
Step 2: Compute accumulated depreciation (or net fixed assets)
and retained earnings that
depend on values from the income statement. For example,
accumulated depreciation
at the end of 2013 will be the sum of accumulated depreciation
at the end of 2012 plus
depreciation expense during 2013 (sometimes if assets are sold
during the year, further
adjustment is necessary. Similarly, retained earnings at the end
of 2013 will be the sum
retained earnings at the end of 2012 plus net income retained
(i.e., not paid out as divi-
dends) during 2013.
Step 3: Fill in all values that are projected according to
company policy or that represent
target policy values. These include inventory; accounts
receivable; accounts payable; and
property, plant, and equipment. Some of these will change as a
percent of sales. Often the
cash account is set at some minimum based on sales.
Step 4: Add up the asset side of the balance sheet, and transfer
that total to the liabilities
and equity side. Balance the asset and liabilities by adjusting a
plug figure, usually bank
loans or notes payable, on the liabilities side of the balance
sheet. If the bank loan is nega-
tive, make it zero, add up the liabilities, move that total to total
assets, and adjust the asset
side, with the cash account taking up whatever slack is
necessary to balance things.
We will go through the four steps with an example that builds

on the pro forma income
statement we just completed for ACME. The actual balance
sheet for 2012 is shown in
Table 3.3. We will construct the balance sheet for 2013 using
the following assumptions:
byr80656_03_c03_043-076.indd 48 3/28/13 3:21 PM
Statements
• The minimum cash balance is 3% of sales
• Working capital accounts (accounts receivable, accounts
payable, and inventory)
will be the same percent of sales in 2013 as they were in 2012.
• $4,000 of new PP&E will be purchased in 2013.
• Other current liabilities (CL) will remain at 2% of sales in
2013.
• There will be no changes in the common stock or long-term
debt accounts.
• The plug figure (the last number entered that makes the
balance sheet balance) is
bank loan.
Table 3.3
Assets as of December 31, 2012
Cash 1,440
Accounts receivable 3,840

Inventory 7,200
Total current assets 12,480
Property, plant, & equipment (PP&E) 24,570
Accumulated depreciation 8,900
Net PP&E 15,670
Total assets 28,150
Liabilities & equity as of December 31, 2012
Accounts payable 1,728
Bank loan (10%) 4,102
Other CL 960
Total current liabilities 6,790
Long-term debt (12%) 5,600
Common stock 1,000
Retained earnings 14,760
Total liabilities & equity 28,150
Step 1: Fill in all of the values that don’t change. The
assumptions tell us that there will
be no changes in the common stock or long-term debt accounts,
so we can enter those
numbers. Table 3.4 shows only the liability side of the balance
sheet to highlight these

two accounts.
byr80656_03_c03_043-076.indd 49 3/28/13 3:21 PM
Statements
Table 3.4
as of December 31, 2013
(pro forma)
Accounts payable 1,728
Bank loan (10%) 4,102
Other CL 960
Long-term debt (12%) 5,600 5,600
Common stock 1,000 1,000
Retained earnings 14,760
Step 2: Move values from the income statement. Accumulated
depreciation at the end of
2013 will be the sum of accumulated depreciation at the end of
2012 plus depreciation
expense during 2013. This will be $1,800. Net income not paid

out as dividends during
2013 will be $3,310. Table 3.5 shows the results.
Table 3.5
(pro forma)
Property, plant, &
equipment (PP&E)
24,570
Accumulated depreciation 8,900 10,700
Net PP&E 15,670
Long-term debt (12%) 5,600
Common stock 1,000
Retained earnings 14,760 18,070
Step 3: Fill in values determined by company policy. The
assumptions tell us that the
cash account needs to be at least 3% of sales. We will start with
this amount ($1,584) and
adjust it later if necessary. Other current liabilities (CL) will
remain at 2% of sales, which
is $1,056 5 0.02 3 $52,800.

byr80656_03_c03_043-076.indd 50 3/28/13 3:21 PM
Statements
Working capital accounts (inventory, accounts receivable,
accounts payable) will be the
same percent of sales in 2013 as in 2012. We compute those
numbers by dividing each of
the 2012 balances for these accounts by $48,000, the sales for
2012. We find that accounts
receivable is 8% of sales, inventory is 15%, and accounts
payable is 3.6%. To find the 2013
values for these accounts, we multiply 2013 projected sales of
$52,800 by the appropriate
percent. The value of accounts receivable in 2013 will be
$4,224. The value of inventory in
2013 will be $7,920. The value of accounts payable in 2013 will
be $1,900.80.
The final policy assumption or plan is that $4,000 of new
property, plant, and equipment
(PP&E) will be purchased.
Putting these items into the balance sheet results in Table 3.6.
Table 3.6
(pro forma)
Cash 1,440 1,584

Accounts receivable 3,840 4,224
Inventory 7,200 7,920
Total current assets 12,480
Property, plant, &
equipment (PP&E)
24,570 28,570
Accumulated depreciation 8,900 10,700
Net PP&E 15,670
Total assets 28,150
(pro forma)
Accounts payable 1,728 1,901
Bank loan (10%) 4,102
Other CL 960 1,056
Long-term debt (12%) 5,600 5,600
Common stock 1,000 1,000
Retained earnings 14,760 18,070

Step 4: Add up the asset side of the balance sheet and transfer
that total to the liabilities &
equity side. Balance the asset and liabilities by adjusting a plug
figure (bank loan). We do
this in Table 3.7. We include an explanation for each of the
entries.
byr80656_03_c03_043-076.indd 51 3/28/13 3:21 PM
Statements
Table 3.7
Assets as of December 31,
2012
as of December 31,
2013 (pro forma)
Explanation
Cash 1,440 1,584 3% of sales
Accounts receivable 3,840 4,224 8% of sales
Inventory 7,200 7,920 15% of sales
Total current assets 12,480 13,728 Sum
Property, plant, &
equipment (PP&E)

24,570 28,570 Plus $4,000
purchased in 2013
Accumulated
depreciation
8,900 10,700 2012 value plus
2013 depreciation
expense
Net PP&E 15,670 17,870 Subtraction
Total assets 28,150 31,598 Current assets plus
net PP&E
Liabilities & equity as of December 31,
2012
as of December 31,
2013 (pro forma)
Explanation
Accounts payable 1,728 1,901 5% of COGS
Bank loan (10%) 4,102 3,971 Subtraction: total
current liabilities –
other CL – accounts
payable
Other CL 960 1,056 2% of sales
Total current
liabilities
6,790 6,928 Subtraction: TL&E

– long-term debt
– common stock
– retained earnings
Long-term debt
(12%)
5,600 5,600 No change
Common stock 1,000 1,000 No change
Retained earnings 14,760 18,070 2012 value 1
2013 earnings
retained from
income statement
Total liabilities &
equity
28,150 31,598 From total assets
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Statements
More on Pro Forma Statements
There are several aspects of pro forma statements that are worth
discussing in further
detail. These include interest expense, negative bank loan plug
figures, differences in
intrayear and end-of-year financing needs, and using the “days”
approach instead of the

point-of-sales method.
Interest Expense
The pro forma financial statements we just completed give an
initial estimate of a com-
pany’s profitability and financing needs. In this example the
interest expense for 2013 was
given as $840, but if you look at the balance sheet, you see that
it should be higher. With
$5,600 of long-term debt at 12% and $3,971 of short-term debt
(bank loan) at 10%, the
interest is then
$1,069 5 12% 3 $5,600 1 10% 3 $3,971
To develop a more precise and accurate forecast, we should
replace the $840 of interest
expense with the calculated value of $1,069. Doing this would
reduce net income and the
amount added to retained earnings on the balance sheet. This
effect would filter up the
liabilities, eventually making the short-term loan need greater.
We would then have a new interest expense value and would
have to complete this process
a second time. Usually one or two such iterations get to a bank
loan and interest expense
combination that doesn’t change very much. That is, we
converge on an answer that has
acceptable accuracy. Table 3.8 shows just the key items that
change as the new interest
expense is inserted into the income statement. From $840,
interest expense increases to
$1,069. This decreases net income, so less money is retained,
making the bank loan larger.
The larger bank loan balance requires more interest ($1,086), as

shown in the bottom row
under Iteration 2. Iteration 3 shows that the loan and interest
have again increased. By
Iteration 4, interest expense no longer changes, so we have
converged on our final bank
loan amount and interest expense.
Table 3.8: Finding the interest rate
2013
(Projected)
Iteration 1
2013
(Projected)
Iteration 2
2013
(Projected)
Iteration 3
2013
(Projected)
Iteration 4
EBIT 6,120 6,120 6,120 6,120
Interest expense 840 1,069 1,086 1,087
Taxable income 5,280 5,051 5,034 5,032
Taxes 1,320 1,263 1,258 1,258
Net income 3,960 3,788 3,775 3,774
Dividends 650 650 650 650

To retained earnings 3,310 3,138 3,125 3,124
(continued)
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Statements
Table 3.8: Finding the interest rate (continued)
2013
(Projected)
Iteration 1
2013
(Projected)
Iteration 2
2013
(Projected)
Iteration 3
2013
(Projected)
Iteration 4
Accounts payable 1,901 1,901 1,901 1,901
Bank loan (10%) 3,971 4,143 4,156 4,157
Other CL 1,056 1,056 1,056 1,056

Total current liabilities 6,928 7,100 7,113 7,114
Long-term debt (12%) 5,600 5,600 5,600 5,600
Common stock 1,000 1,000 1,000 1,000
Retained earnings 18,070 17,898 17,885 17,884
Total liabilities & equity 31,598 31,598 31,598 31,598
Corrected interest expense (10%
3 bank loan 1 12% 3 long-term
debt)
1,069.10 1,086.28 1,087.57 1,087.67
You might ask why we cannot program our spreadsheet to
compute this final solution for
us. If you create a spreadsheet in which interest expense is a
function of debt amounts,
and debt amounts rely on net income (which is determined by
interest expense), then
you have a circular system. Spreadsheets can’t cope with
circular arguments. Excel- has a
feature that addresses this problem. It is called “Calculate
Iterations” and can be switched
on under “Preferences.”
Negative Bank Loan Plug Figure
The plug figure is the number that varies so the balance sheet
balances. Usually this is a
short-term loan account. Sometimes the plug figure will be
negative. We cannot have a
negative loan amount, so we need to adjust the balance sheet so
that the loan is zero. We
will need to add the amount of the negative loan to cash, as a

positive number (e.g., if
the loan is 227, you would add 27 to cash), and then make all of
the adjustments down
the asset side of the balance sheet (total current assets and total
assets both increase).
Then we use the new total assets as the total liabilities & equity
and work up that side
of the balance sheet until the loan plug figure becomes zero.
End-of-Year Versus Intrayear Financing Need
The pro forma statements we created showed that the company
needed a certain bank
loan at the end of the fiscal year. If a company has relatively
level sales or constant sales
growth, the end-of-the-year estimate is appropriate. However, if
the company has sea-
sonal sales, the end-of-the-year estimate could be far from the
company’s real financing
need. In a company with seasonal sales, the greatest financial
need is almost always at the
byr80656_03_c03_043-076.indd 54 3/28/13 3:21 PM
Statements
start of the high season. Production in preparation for the high
sales period requires large
outlays, but money hasn’t started coming in. When doing
financial forecasting it is impor-
tant to do the forecast when the need is likely to be greatest,
even if this doesn’t coincide
with the company’s fiscal year.

Days Versus Percent of Sales
We have used the percent-of-sales method to construct pro
forma financial statements
in this chapter. Another, equivalent, approach, is using “days”
or activity ratios. In our
example accounts receivable were computed as 8% of sales. We
could have said that num-
ber of accounts receivable days was 29.2 days (8% of 365 days)
and arrived at the same
dollar amount of accounts receivable. Accounts receivable days
is also called days sales
outstanding. Inventory and accounts payable can also be
expressed in terms of days. In
accounting these are referred to as activity or efficiency ratios.
The “days” approach works well sometimes because it
immediately shows whether a
company is following its stated policy. If the number of
accounts receivable days is 47, but
the company’s stated credit policy is payment within 30 days,
then either the collection
system isn’t working or the company is extending credit to
higher-risk customers than
it should. Similarly, a company could have a policy of paying
its suppliers on time, but
the activity ratio might show that it is, on average, late. This
could harm the company’s
relationship with the supplier. In fact, if it occurs too often the
supplier could sever the
relationship or require cash on delivery.
If you are given days, you need to be aware that the value of the
accounts receivable
account is based on sales, but the values of inventory and
accounts payable are based
on costs. Thus, a 30-day payable period would translate into

accounts payable as
30/365 3 (credit purchases) or 30/365 3 COGS. Here are the
standard formulas for activ-
ity ratios, which should allow you to make the translation from
days to percent of sales,
and then to dollars:
Accounts Receivable Days 5 365 3 Accounts Receivable/Sales
Accounts Payable Days 5 365 3 Accounts Payable/COGS
Inventory Days 5 365 3 Inventory/COGS
See Demonstration Problem 3.1 for an example.
Sometimes you will see accountants using 360 days instead of
365. The important thing
is to be consistent. The 5 fewer days usually won’t have a huge
impact on forecasts. For
a more accurate result if a company is growing (or shrinking),
average the balance sheet
items from the start of the period and the end of the period. For
example, if the values
of accounts receivable at the end of 2013 and 2014 were,
respectively, $500 and $700, the
average would be $600. This average better matches the sales
from the income statement,
which is measured over the entire year.
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CHAPTER 3Section 3.2 The Cash Budget
Demonstration Problem 3.1: The Days Model

During 1999 Taylor Enterprises had sales of $358,920 and
associated cost of goods sold of $241,481.
The average accounts receivable balance for 1999 was $27,534,
while the average inventory balance
was $43,003. Accounts payable averaged $15,127 during 1999.
Use these data to compute Taylor
Enterprises’s financing gap in days and in dollars.
Solution
: First compute the following three activity ratios:
receivable days 5
average accounts receivable
annual credit sales
3 365 days
5
27,534
358,920
3 365 5 28 days

inventory turnover days 5
average inventory
cost of goods sold
3 365 days
5
43,003
241,481
3 365 5 65 days
accounts payable days 5
average accounts payable
cost of goods sold
3 365 days
5
15,217
241,481
3 365 5 23 days
We combine these activity ratios into the days model as

follows:
Financing Gap in Days 5 Receivables Days 1 Inventory
Turnover Days 2 Accounts Payable Days
5 28 1 65 2 23 5 70 days
We transform days into dollars by multiplying the financing gap
in days by the cost of goods sold per
day. This gives us a rough estimate of how much money is
required to see the company through until
it begins collecting cash from customers. Thus
Financing Gap in Dollars 5 Financing Gap in Days 3 Cost of
Goods Sold per Day
5 70 days 3
COGS
365 days
3
241,481
365

5 $46,311
Thus, the firm needs a cash buffer of approximately $46,311 to
support its activities until cash arrives
from the collection of accounts receivable.
3.2 The Cash Budget
Companies use many types of budgets: production budgets,
capital budgets, mar-keting budgets, and more. All budgets are
planning tools. They show what the company plans to do in the
future in some activity area. Production budgets show
the number of units of each product that the company
manufactures and the costs of
that production. Capital budgets determine what long-lived
assets will be purchased and
thereby define how the company operates. We discuss capital
budgeting in much more
detail in Chapter 7. The marketing budget ensures that potential
customers hear about
your products. We have included a short article about creating a
marketing budget in the
Web Resources section at the end of this chapter.
byr80656_03_c03_043-076.indd 56 3/28/13 3:21 PM

The budget we focus on in this chapter is the cash budget. The
cash budget is the primary
planning tool for short-term finance. Its purpose is to predict
shortages and surpluses of
cash. The cash budget is especially important as an early
warning of insolvency or periods
of cash shortages. It gives the firm time to accumulate cash
reserves, reduce the period of
its cash cycle, or arrange for credit. For example, a firm with
seasonal sales may generate
a large cash surplus during its busy season, but operate at a
deficit during its low season.
Knowing how much of the surplus cash it must keep to get
through the following low
period helps managers plan.
For many companies creating a monthly cash budget for the
next 6 months or a year is
very effective. This schedule matches many business
transactions, which occur on a

monthly schedule (e.g., employees are paid every 2 weeks or
monthly, bills are paid
monthly, credit terms are often 30 days, etc). A company with
potentially large fluctua-
tions in cash, such as a casino, might prepare cash budgets on a
weekly basis, or update
the cash budget whenever a large cash outlay occurs (when
someone wins big!).
Because distant cash flows are
difficult to forecast on a weekly
basis, it makes sense to use
monthly budgets for the year
ahead, and then weekly budgets
for the immediately upcoming 1
or 2 months. A common practice
is to use rolling budgets. Each
month, a new month is added,
and each week a new week is
added. In this way, the com-
pany always has a budget for
12 months and 8 weeks ahead,
for example.
Creating a Cash Budget

The cash budget involves virtually all elements of the firm. The
budget hinges on sales
forecasts from the marketing and sales staff and possibly
economic consultants. Credit
policies determine collection periods. Purchasing, production,
and human resources staff
must provide essential information on inventory purchases and
payments, labor costs,
and production schedules. Support groups, such as information
systems, the legal depart-
ment, and engineering must forecast expenses. The capital
budget (plans for purchases of
large equipment or fixed assets) must be included. All of these
functional elements in the
corporation have a stake in the cash budget because they depend
on money being avail-
able as needed. Poor cash planning could result in a cash
shortage that would disrupt
important business activities.
Cash budgets always begin with a sales forecast. Cash receipts
and many expenses are
tied directly to sales activity, making an accurate sales forecast
essential. Sales forecasts

may come from two sources, the sales department and
corporate, or outside, economists.
Salespeople know their customers and competitors, but they
may not understand demo-
graphic, economic, and industry trends that affect future sales.
Forecasts from these two
sources can be combined to produce the best available forecast.
Donald Reilly/The New Yorker
Collection/www.cartoonbank.com
byr80656_03_c03_043-076.indd 57 3/28/13 3:21 PM
www.cartoonbank.com
Most companies make at least some of their sales on credit.
Therefore, the cash budget
must reflect the timing of collection of these receivables. The
forecast of cash receipts
(when cash actually is collected) will be based on the historic
pattern of collections. For
example, 10% of sales might be for cash, so the money is

collected at the time of the sale.
Sometimes companies offer a small discount for cash sales, such
as 2% below the list price.
Another portion may be credit sales that will be paid within 1
month. These two parts of
the pattern (2% discount for cash sales and payment at full price
within 1 month) would
be reflected in the credit terms 2% 10/Net 30, which translates
as a 2% discount for pay-
ment within 10 days, and full payment (i.e., no discount), within
30 days. Finally, there
may be some sales that are slow to collect, so the cash only
arrives 2 months after the sale.
If we want, we can include some small percentage for bad
accounts.
There maybe a pattern for purchasing raw materials or inventory
for resale. Many of these
expenses are tied to production, which may precede sales by
several weeks or months.
This payment pattern needs to be identified to ensure that the
cash budget has the correct
timing of cash expenditures. If the company purchases materials
or inventory on credit,
then the cash budget will reflect the payment schedule that the

company uses. It may pay
some bills immediately to obtain a discount or wait until the end
of the 30-day or 45-day
credit period, thereby postponing its outlay and getting more
use of the cash. The com-
pany can often forecast its tax payments and any significant
outlays for new equipment.
Wage and salary expenses are usually paid in the month in
which they are incurred. In
some states businesses are required to pay hourly employees
every 2 weeks, while sala-
ried employees can be paid monthly or on an even longer
schedule.
Cash Budget Example
Shining Star Manufacturing Inc. makes a variety of large metal
seasonal decorations, such
as snowflakes, reindeer, snowmen, etc., which are used in
shopping malls and municipal
parks. The business is highly seasonal, with revenues peaking in
the late summer and fall,
then dropping to very low levels the rest of the year. In the past
the company has used a
short-term bank loan to get through the last few months of the

low season and to have the
necessary cash to begin to produce inventory for the next high
sales period. It is important
that Shining Star estimate its cash needs, and the timing of
those needs, so that it can make
sure sufficient cash will be available from its bank.
It is early July 2013. Shining Star Manufacturing is getting
close to its next production
cycle, and its cash surplus from the previous year is getting
small. It needs to estimate
its loan need for the upcoming season. Shining Star’s banker
will need to know both the
maximum amount and the timing of the need (e.g., when the
credit line will be accessed
and when it will be repaid). To determine the loan amount and
timing, we will create a
cash budget for the months July through December.
Cash Receipts
We begin by computing the cash receipts. This requires a
pattern of collections. Histori-
cally, customers have paid as follows:
• The company offers customers a 5% discount if they pay at the

time of sale.
About 20% of the customers take advantage of this discount.
This means that for
every $100 of merchandise sold, Shining Star collects $19.00 in
the sale month.
byr80656_03_c03_043-076.indd 58 3/28/13 3:21 PM
This represents 20% of the sales being sold at a 5% discount or
at 95% of full price
($100 3 0.20 3 0.95 5 $19.00).
• Credit sales: 50% of each month’s sales are collected 1 month
after the sale, and
30% are collected 2 months after the sale.
Table 3.9 lists the sales forecasts for the next 7 months (and
actual sales for May and June).
Table 3.9: Shining Star sales forecasts

Month Sales ($000s)
May 2013 200
June 2013 200
July 2013 250
August 2013 500
September 2013 650
October 2013 700
November 2013 500
December 2013 250
January 2014 200
The cash budget begins in July, so we need the cash receipts for
July. These will come from
three different sources: cash sales made in July, collection of
credit sales made in June
(customers paying in 30 days), and the collection of credit sales

made in May (customers
paying in 60 days).
In July $50,000 of merchandise is sold for cash, but those
customers receive a 5% discount,
so the money received is $47,500. Credit customers from June
send in $100,000. This is 50%
of June sales. Finally, some late payers from May send in
$60,000. This is 30% of May sales
of $200,000. The total cash inflow for July 2012 is $207,500.
This pattern is repeated for August through December. Figure
3.1 shows the details of
the cash receipts for July and August 2012, and the totals for
the other months through
December. As a test of your understanding, make sure that you
can reach the same totals
for September through December.
Figure 3.1: Shining Star cash receipts
Sales
Cash

30-day
60-day
Total
Month May
200 200 250 250500
95.00
125.00
60.00
280.00 448.50 507.50608.00 640.00
47.50
100.00
60.00
207.50

500650 700
June July August September October November December
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Cash Expenditures
Expenditures can have different payment patterns. Employee
wages are usually paid
every 2 weeks or monthly. Payments for materials depend on
the credit terms offered
by suppliers. Raw materials and employee wages depend on the
quantity of items being
produced, which in turn depends on sales. Some payments occur
sporadically, such as
quarterly tax payments or outlays for new equipment. The
Shining Star Manufacturing
example demonstrates several of these potential patterns.
Raw Materials

Raw materials comprise a significant portion of costs of goods
sold for Shining Star. In
fact, raw materials average 60% of sales. The cash outlay
pattern for raw materials follows
this pattern: Materials are ordered 2 months in advance and are
paid for the following
month. So, materials for July are ordered in May and paid for in
June. Figure 3.2 shows
this ordering and payment pattern for July and August sales. In
July the company will pay
for August’s raw materials. The outlay will be 60% of August’s
sales, or 60% of $500,000,
which is $300,000. September sales of $650,000 require
$390,000 of raw materials, which
are ordered in July and paid for in August.
Figure 3.2: Shining Star raw materials purchases
Other Expenditures
As we mentioned earlier in the chapter, many states require that
hourly employees be paid
every 2 weeks and in a timely manner. Shining Star’s
manufacturing process doesn’t take
much time, so items are produced as orders arrive. The company
pays its employees in

the month of production, which is also the month of sales.
Manufacturing labor is 20% of
sales, so manufacturing wages in July will be 20% of July sales
(0.20 3 $250,000 5 $50,000)
and will be paid for in July. Similarly, manufacturing wages in
August will be 20% of
August sales (0.20 3 $500,000 5 $100.000) and will be paid for
in August.
Some expenditures are fixed, so they don’t vary from month to
month. For example, man-
agerial salaries ($30,000 per month) and rent and lease
payments ($15,000 per month) are
fixed costs. Other expenditures occur once or a few times a
year. Quarterly tax payments
are a good example of such a payment pattern. Shining Star will
make tax payments of
$25,000 in September and December. The company plans on
buying a new fabricating
Raw
Materials
Month May

July materials
are paid for in
June
August materials
are ordered in June
August
materials are
paid for in July
July materials
are ordered in
May
June July August
byr80656_03_c03_043-076.indd 60 3/28/13 3:21 PM

machine in August for $100,000. We can now complete the
expenditure portion of the
cash budget. Figure 3.3 shows all expenditures for July through
September and totals for
October through December. Be sure that you can compute these
totals.
Figure 3.3: Shining Star cash expenditures
Table 3.10 shows what we have completed so far.
Table 3.10
Month May
2012
Jun
2012
Jul
2012
Aug
2012

Sep
2012
Oct
2012
Nov
2012
Dec
2012
Jan
2013
Sales ($000s) 200 200 250 500 650 700 500 250 200
Cash receipts 47.5 95 123.5 133 95 47.5
30-day 100 125 250 325 350 250
60-day 60 60 75 150 195 210
Total receipts 207.5 280 448.5 608 640 507.5

Materials 300 390 420 300 150 120
Labor 50 100 130 140 100 50
Salaries 30 30 30 30 30 30
Rent/leases 15 15 15 15 15 15
Taxes 25 25
New
machinery
100
Total
expenditures
395 635 620 485 295 240
Sales ($000s)
Raw Materials

Manufacturing
Labor
Salaries
Rent
Taxes
New Machine
Total
Cash Outlays
Month July
250
300
50
30
500 650

390
700
100
100
420
395 635 620 485 295 240
30
130
15
30
15 15
25

200500 250
August September October November December January
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Changes in Cash, Loan Need, and Surpluses
The final stage of creating a cash budget is like tracking your
checking account balance.
Shining Star has a cash balance of $110,000 at the beginning of
July. This $110,000 is the
last of the company’s cash surpluses from its previous high
season of sales. The company
needs at least $50,000 as a cash buffer or minimum cash
balance. At the beginning of July
there is no loan outstanding. The company has a cash surplus—
the $110,000 cash balance
exceeds its $50,000 minimum—so it has no need for a loan.
For each month from July through December, we will calculate
the change in cash due to

cash collections and outlays. We will compare this to the cash
balance and determine if
the company has a cash surplus (cash balance greater than $50)
or needs a loan to reach
the $50,000 minimum cash balance amount. We will accumulate
the loan amounts so that
we can tell the banker the size of the loan the company will
need at its maximum borrow-
ing. Figure 3.4 shows this process for the months July through
October. It also gives the
final result (surplus or loan) for November and December. Be
sure you can compute these
results for those 2 months.
Figure 3.4: Shining Star cash surpluses and loans (in thousands
of dollars)
The cash budget shows us that as the company begins to
increase its spending in July
(acquiring raw materials for August manufacturing), it quickly
runs a cash shortage. This
need grows through September, reaching a maximum loan of
$654,000. As production
slows and the company begins to collect cash from customers,
the loan is paid down and

eventually a surplus emerges in December.
Cash Receipts
Cash Outlays
Change
in Cash
Beginning
Cash
End Cash
Without Loan
End Cash
With Loan
Loan
Repayment
Loan
Cumulative
Loan

Cash
Surplus
Month July
207.50
395.00
–187.50
110.00
280.00 448.50
635.00
608.00
–355.00
482.50
620.00 485.00 295.00 240.00

267.50345.00123.00
50.0050.0050.00
127.50 654.00 531.00
123.00
186.00
81.50
0.00
0.00
50.00
50.0050.0050.00
–171.50
171.50

–77.50
127.50 355.00
–305.00
50.00
173.00–121.50
640.00 507.50
August September October November December
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Recognize the Limitations of End-of-Month Accounting
The cash budget suggests that if the company arranges for a
loan of $654,000, then it will
never have a cash shortage, but this is not quite true. The
amounts in the cash budget are for

the end of the month. We don’t know the timing of cash outlays
and cash receipts within the
month. If the company must pay its bills at the beginning of the
month but only receives its
cash at the end of the month, there could be a deficit. The
$50,000 cash buffer was chosen to
cover this deficit, but be aware that the cash budget reports only
end-of-month balances, and
we don’t know about the intramonth timing of cash flows. If
this is a problem, the company
may need to create a cash budget using 2-week intervals instead
of the 1-month periods in
this cash budget. This concern also applies to pro forma
financial statements.
Understand Your Assumptions
Spreadsheet programs make creating forecasts with pro formas
and cash budgets fairly
easy. But you need to keep in mind that the mechanical
structure of the forecast, while
important, is less important than the content you enter into the
model. There is a phrase
from computer science that is applicable here: garbage in–
garbage out (GIGO). If you
build your forecast using unrealistic numbers, the result will be

incorrect. It is crucial that
you think about the assumptions you use in your forecasting
model. As you prepare your
forecasts, you need to ask yourself questions such as: Does the
cost of goods sold number
match cost data? Does sales growth match market and overall
economic conditions? Are
accounts receivable based on the company’s credit policy and
customer mix? We have
included two short articles about financial forecasting
assumptions in the Web Resources
at the end of the chapter.
Here is an example of how constructing financial forecasts
without paying close attention
to the underlying assumptions can be costly. The owner and
manager of a local business
selling green and eco-friendly building supplies and home
furnishings was raising money
to expand her business, so a neighbor decided to invest in the
business. The financial
forecasts all looked great and supported expansion. At this time
the first signs of the real
estate crash were being felt in several U.S. states, but the
market the store served was

doing fine. A new location was found, the space was remodeled,
new lines of inventory
were purchased, and then the local real estate market softened.
For the next 2 years only
a handful of new houses were built in the multicounty region.
Sales at the store eroded,
and eventually it closed. The financial forecasts were based
entirely on how the real estate
market had behaved, not on what was likely to happen in the
future. Had the pro forma
statements been based on less optimistic growth forecasts, the
expansion plan would have
been postponed, and the store might have weathered the
recession. That one key assump-
tion about sales growth doomed the store to failure.
Use Information from Other Company Departments
We began this chapter by saying that financial forecasting
requires information from
throughout the firm. Sales forecasts come from marketing and
salespeople as well as
managers observing the overall economy. Costs come from
across the company—human
resources, production, inventory managers, and so on. We have
to recognize that good

byr80656_03_c03_043-076.indd 63 3/28/13 3:21 PM
CHAPTER 3Summary
forecasts (i.e., accurate forecasts) depend on good information.
Finance is just one of many
important functional areas in a company. If your career takes
you into financial manage-
ment, be sure to get to know colleagues in other departments. In
the Web Resources at the
end of the chapter, there is a short article from the Financial
Times that discusses how silo
thinking (not going beyond one’s own narrow area) contributed
to the fall of the invest-
ment banking firm Lehmann Brothers. To be effective in finance
you have to get out of the
finance silo!
Financial Forecasting and Business Policy and Strategy
While introducing the construction of pro forma financial
statements and cash budgets,
we focused on estimating cash need. But these tools, especially

pro forma statements,
can do much more. Forecasting lets you test policy changes
before implementation to
be sure that they will create value for the company. For
example, new credit policies can
be examined to see how the tradeoff between offering credit to
more customers, thereby
increasing sales, and enduring more bad debt expenses affects
profits. As a company con-
siders an expansion or the launch of a new product line, it can
use pro forma statements
to determine how much working capital and long-term funding
it will need. Forecasting
can be applied to any changes with financial ramifications. If
the human resources depart-
ment proposes a more generous family leave policy, pro forma
financial statements can be
used to estimate how higher employee retention, and lower
recruiting and training costs,
will offset anticipated costs of the program. Financial
forecasting tools are quite versatile.
Many of our students have commented that these are the
financial tools they use most
often once they join a business.

Summary
This chapter introduced two financial forecasting tools—pro
forma (or projected) financial statements and the cash budget.
These forecasting tools will be impor-tant not only as you
progress through this your study of finance, but also during
your business career. All companies need to do financial
forecasting, but it is particularly
important for small, fast-growing companies with limited cash
reserves. Forecasting can
help companies avoid some of the problems that lead to
business failure. Without fore-
casts managers are driving the company without a map.
While the chapter focused primarily on the mechanics of pro
forma statements and cash
budgets, it also discussed the limitations of these tools. The
results of a forecast are only
as good as the inputs and assumptions used to create them—the
garbage in–garbage out
scenario. You can improve the quality of the forecasts by
reaching out to people beyond
the finance department for information. Financial forecasting is
a great example of the
interdependence among all of a company’s departments.

byr80656_03_c03_043-076.indd 64 3/28/13 3:21 PM
CHAPTER 3Web Resources
Key Terms
activity ratios Ratios that express balance
sheet items in terms of days rather than
percent of sales.
capital budget Planned expenditures on
long-lived assets such as machines and
equipment.
cash budget An estimation of the cash
inflows and outflows for a business or
individual for a specific period of time.
cash surplus Cash balances in excess of
the minimum required cash balance. Sur-
plus cash can be invested to earn income.

credit terms The payment terms given to
customers, which often include the size
of the discount for early payment, the
length of the early payment period, and
how many days after purchase before the
bill is overdue. An example is 2% 10/Net
30, which translates as a 2% discount if
paid within 10 days of the sale, but the full
amount is due within 30 days of the sale.
GIGO Garbage in–garbage out.
plug figure The balance sheet item that
varies to make the balance sheet balance.
It is often a short-term loan account but
can vary depending on the needs of the
analysis.
pro forma financial statements Projected
or anticipated financial statements. They
help the company plan for the future.
rolling budget A cash budget that drops
the most recent month and adds a future
month so the forecast always covers a

given number of months.
Web Resources
This article discusses how the sales forecast drives much of
financial forecasting:
http://www.esmalloffice.com/SBR_template.cfm?DocNumber=P
L10_0100.htm.
This article from the U.S. government’s Small Business
Administration, which has lots
of resources for people thinking about or running their own
small companies, discusses
how to create a marketing budget:
http://www.sba.gov/community/blogs/how-set-marketing-
budget-fits-your-business
-goals-and-provides-high-return-investmen.
To find information for forecasts, follow links at the bottom of
the first webpage for
details on sales and expense forecasting:
http://www.smallbusiness.wa.gov.au/financial-forecasts/.
This article from the Financial Times discusses the dangers of
silo thinking:

http://digital.olivesoftware.com/Olive/ODE/FTUSEDU/Landing
Page/LandingPage.aspx
?href=RklULzIwMDkvMTIvMTU.&pageno=MzM.&entity=QXI
wMzMwMg. .&view=ZW
50aXR5.
byr80656_03_c03_043-076.indd 65 3/28/13 3:21 PM
http://www.esmalloffice.com/SBR_template.cfm?DocNumber=P
L10_0100.htm
budget-fits-your-business-goals-and-provides-high-return-
investmen
budget-fits-your-business-goals-and-provides-high-return-
investmen
http://www.smallbusiness.wa.gov.au/financial-forecasts/
Page/LandingPage.aspx?href=RklULzIwMDkvMTIvMTU.&page
no=MzM.&entity=QXIwMzMwMg. .&view=ZW50aXR5

CHAPTER 3Practice Problems
Critical Thinking and Discussion Questions
1. Evaluate the following statement: The best financial forecasts
will come from
forecasts developed entirely within the finance function.
2. Why it important to assess your firm’s cash needs within a
period, even though
you may have constructed pro forma financial statements?
3. What are the important limitations for financial forecasting?
4. What are activity ratios? Why are they important?
5. The cash budget is the primary planning tool for short-term
finance. Why is the
cash budget so important?
Practice Problems
Mini-Case: Specialty Hardwoods, Inc.

It is early 2013 and Tim O’Dell, president and majority owner
of Specialty Hardwoods Inc., is very
worried about the firm’s short-term financing. His accountant
has just brought the year-end 2012
financial statements to Tim. The statements show what Tim
already knows, the $35,000 line of credit
from First Interstate Bank is completely drawn down, and cash
balances are well below the $10,000
minimum balance Tim feels is necessary.
Tim started Specialty Hardwoods in 1997 with a family loan of
$160,000 and $80,000 of Tim’s and
his wife’s savings as equity. At the time, Tim had been very
interested in making fine furniture but
had problems finding rare hardwoods to use in his projects. To
fill this void, he began a mail-order
lumber business specializing in wood for craftsmen. He found
sources in the United States for fine
cherry, oak, walnut, and yew and began importing exotic woods
such as ebony, cocobolo, tulipwood,
ironwood, and many varieties of rosewood. Initially, the lack of
competition allowed him to maintain
a high profit margin. Annual sales growth of 15% to 25% was
financed entirely by profits and the

startup capital. Furthermore, operating expenses had been kept
low because Tim did all of the firm’s
marketing and purchasing himself. Besides Tim, the firm had
six employees. These employees were
primarily responsible for filling mail orders and billing
customers.
In 2005 several competitors emerged in the marketplace. Each
year, in order to continue to increase
sales, Tim had to lower prices slightly, or not raise them despite
having to pay his suppliers more.
Between 2005 and 2012, his gross margin fell from 28.6% to
26.2% of sales. In 2010, he had been
forced to forgo the cash discounts his suppliers offered. By
2011, he was beginning to have trouble
meeting his suppliers’ 30-day payment terms and was forced to
arrange a line of credit for $10,000
with his bank. During 2012, the line of credit had to be
increased to $35,000. In a recent conversation
with his banker, Tim had been told that it would be difficult for
the bank to grant further increases
of the credit line. The banker was concerned about the amount
of long-term debt outstanding and
about Tim’s inability to pay down any of the $35,000 loan. The
banker did say the $35,000 would

continue to be available through 2013 but that the bank could
not increase the loan amount.
Tim thought that there were three possible strategies for 2013,
but he was not sure how to analyze
them. Tim would like you to analyze the three plans described
below. Financial statements from 2010
through 2012 are included.
Plan 2013A: Sales growth will be stimulated by offering low
prices. Tim is uncertain whether the
$35,000 credit line will be sufficient to finance this plan.
(continued)
byr80656_03_c03_043-076.indd 66 3/28/13 3:21 PM
Mini-Case: Specialty Hardwoods, Inc. (continued)
Objectives:
Sales growth of 25%.

Gross margin 5 26% of sales.
Pay suppliers in 30 days.
Plan 2013B: Limit sales to exotic, high-profit-margin types of
wood. Lower sales growth, with higher
return and lower inventories, will reduce financing need.
Objectives:
Plan 2013C: Follow plan B but take the cash discount offered
by suppliers. This requires paying for
inventory in 10 days, rather than 30, which may strain his
available working capital.
Objectives:

The Gross Margin of 32% of sales includes the 2% supplier
discount.
You have been asked to prepare 2013 pro forma income
statements and balance sheets for each of
Tim O’Dell’s plans. The actual financial statements from 2010
through 2012 are shown below. Base
your pro forma analysis of all three plans, on the following
assumptions:
• All sales are credit sales.
• GA&S (including interest) 20% of sales.
• All after-tax profits are retained in the firm.
• A/R and inventory days of 45 and 90, respectively, based on a
365-day year.
• Net fixed assets will be unchanged at $90,000.

• Make the $8,000 long-term debt payment.
• Other current liabilities will remain 2% of sales.
• Cash balance minimum of $10,000.
• The tax rate is 40%. (continued)
byr80656_03_c03_043-076.indd 67 3/28/13 3:21 PM
Specialty Hardwoods, Inc.
Income Statement (Actual)
all numbers in thousands (000s)
2010 2011 2012
Sales $700 $860 $1,070

COGS $500 $620 $790
Gross margin $200 $240 $280
GA&S expense $150 $180 $210
Profit before taxes $50 $60 $70
Tax (40%) $20 $24 $28
Net income $30 $36 $42
Balance Sheets (Actual)
as of December 31
2010 2011 2012
Assets:
Cash $22 $7 $8
A/R $88 $108 $134

Inventory $125 $155 $198
Total current $235 $270 $340
Net fixed assets $65 $80 $90
Total assets $300 $350 $430
Liabilities & equity:
Bank loan $0 $9 $35
Accounts payable $42 $52 $68
Other CL $14 $17 $21
Current portion long-term debt $8 $8 $8
Total CL $64 $86 $132
Long-term debt $56 $48 $40
Common stock $80 $80 $80

Retained earnings $100 $136 $178
Total liabilities & equity $300 $350 $430
(continued)
byr80656_03_c03_043-076.indd 68 3/28/13 3:21 PM
Pro Forma Statements for 2013: Plans A, B, and C
Plan A Plan B Plan C
Sales ______________ ______________ ______________
COGS ______________ ______________ ______________
Gross margin ______________ ______________
______________

GA&S expense ______________ ______________
______________
Earnings before tax ______________ ______________
______________
Taxes (40%) ______________ ______________
______________
Net income ______________ ______________ ______________
Balance Sheets as of December 31
Cash ______________ ______________ ______________
Accounts receivable ______________ ______________
______________
Inventory ______________ ______________ ______________
Total CL ______________ ______________ ______________
Net fixed ______________ ______________ ______________

Total assets ______________ ______________
______________
N/P (bank) ______________ ______________ ______________
Accounts payable ______________ ______________
______________
Other CL ______________ ______________ ______________
Current long-term
debt
______________ ______________ ______________
Total CL ______________ ______________ ______________
Long-term debt ______________ ______________
______________
Common stock ______________ ______________
______________
Retained earnings ______________ ______________
______________

Total liabilites &
equity
______________ ______________ ______________
(continued)
byr80656_03_c03_043-076.indd 69 3/28/13 3:21 PM
Specialty Hardwoods Case

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