This document provides an overview of cash flow and financial planning. It discusses key concepts like depreciation, statements of cash flows, operating cash flow, free cash flow, and financial planning processes. The learning goals are to understand tax depreciation, statements of cash flows, and financial planning, including long-term strategic plans and short-term operating plans like cash budgets and pro forma financial statements. Examples are provided to illustrate concepts like depreciation calculations and developing statements of cash flows. Ethics examples consider appropriate CEO compensation and ways accountants could portray favorable earnings.
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
Assurance and advisory firm Nkonki will be hosting a roundtable session exclusively for CFOs with Darrel Scott, Board Member of the IFRS Foundation. Scott, who is in Johannesburg for the occasion, will provide global and industry insights on the newly-released IFRS 16, issued on 13 January 2016, to CFOs from many of South Africa’s leading companies.
“The session is designed to share insights and deliberate on how this new accounting standard will impact processes and financial reporting, and how industries across the globe will deal with this change,” says Sindi Zilwa, CEO of Nkonki. It will also provide an update on accounting developments in the medium term.
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, namely, the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
Assurance and advisory firm Nkonki will be hosting a roundtable session exclusively for CFOs with Darrel Scott, Board Member of the IFRS Foundation. Scott, who is in Johannesburg for the occasion, will provide global and industry insights on the newly-released IFRS 16, issued on 13 January 2016, to CFOs from many of South Africa’s leading companies.
“The session is designed to share insights and deliberate on how this new accounting standard will impact processes and financial reporting, and how industries across the globe will deal with this change,” says Sindi Zilwa, CEO of Nkonki. It will also provide an update on accounting developments in the medium term.
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, namely, the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
This presentation is designed to:
- clarify common confusion between profit and cash in the bank
- provide practical actions that you can immediately use in your business
- offer an example of a cash flow report that can help a business owner
‘Cash is king’ – a concept fundamentally important for businesses to understand – was the key theme that the speaker, Mr. Benny Chan, Senior Vice President of DBS SME Banking, stressed on. Benny spoke about the function of cash as the “lifeblood of the business” and as a safety net for unexpected financial situations.
He gave an in-depth explanation of the cash conversion cycle, providing business owners with a clearer understanding of how loans can assist businesses to cover financing gaps created by shortfalls in operating cash flow. Without cash, a business’ suppliers and creditors cannot be repaid, and owners face the danger of debts overwhelming the business. He also shared concrete steps that a business can take to improve its cash flow position.
Lezione logistica produzione 2012 (Levanti)EAAUNIPA
Queste sono le slide spiegate dalla levanti inerenti la parte di logistica. Non sono incluse però quelle di Dominici (quelle con i velieri per intenderci).
This document is an attempt to create financial literacy among salaried professionals who have begun their professional career. The intent of the document is to emphasize financial planning and create awareness about various asset classes. The sample financial plan is also available in excel format for you to experiment your financial needs. If your are interested in the excel based plan, please send an email to me.
Should you need any clarification/help, just send an email.
Happy learning!
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Sample Comprehensive Personal Financial Plan in Excel with Entire Life Cash Flow, Child Future Planning, Future Need & Dream Planning, Retirement Planning, Investment Planning, Investment Analysis, Portfolio Rebalancing, All Life Insurance Policy Analysis including LIC's Plan, IRR Calculation, Mutual Fund Porttfolio Analysis, Mutual Fund Portfolio Rebalancing, Practical Asset Allocation with Scheme Removal / Addition. Also seek possibilities of early retirement. Income Tax Planning with Net Taxation Ratio on your Income. Instant Generated Financial Plan in Excel with Real time value of your all Financial Investment ( In Indian Context). If uou need more info, kindly mail me.
The aim of Working in Partnership HSC ? Assignment is to test the learners understanding of the importance of working posi-tively in partnership with others in health and social care. You should refer to the assessment criteria and also the relevant unit content, when preparing your evidence for assessment.
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LA HUG - Video Testimonials with Chynna Morgan - June 2024Lital Barkan
Have you ever heard that user-generated content or video testimonials can take your brand to the next level? We will explore how you can effectively use video testimonials to leverage and boost your sales, content strategy, and increase your CRM data.🤯
We will dig deeper into:
1. How to capture video testimonials that convert from your audience 🎥
2. How to leverage your testimonials to boost your sales 💲
3. How you can capture more CRM data to understand your audience better through video testimonials. 📊
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s DholeraAvirahi City Dholera
The Tata Group, a titan of Indian industry, is making waves with its advanced talks with Taiwanese chipmakers Powerchip Semiconductor Manufacturing Corporation (PSMC) and UMC Group. The goal? Establishing a cutting-edge semiconductor fabrication unit (fab) in Dholera, Gujarat. This isn’t just any project; it’s a potential game changer for India’s chipmaking aspirations and a boon for investors seeking promising residential projects in dholera sir.
Visit : https://www.avirahi.com/blog/tata-group-dials-taiwan-for-its-chipmaking-ambition-in-gujarats-dholera/
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
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At its core, generative artificial intelligence relies on the concept of generative models, which serve as engines that churn out entirely new data resembling their training data. It is like a sculptor who has studied so many forms found in nature and then uses this knowledge to create sculptures from his imagination that have never been seen before anywhere else. If taken to cyberspace, gans work almost the same way.
Memorandum Of Association Constitution of Company.pptseri bangash
www.seribangash.com
A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
https://seribangash.com/article-of-association-is-legal-doc-of-company/
Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
www.seribangash.com
Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
https://seribangash.com/promotors-is-person-conceived-formation-company/
Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
https://seribangash.com/difference-public-and-private-company-law/
Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.
Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
price and product quality), as well as assessing competitive and market conditions
(i.e., industry structure in the language of economics).
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...BBPMedia1
Marvin neemt je in deze presentatie mee in de voordelen van non-endemic advertising op retail media netwerken. Hij brengt ook de uitdagingen in beeld die de markt op dit moment heeft op het gebied van retail media voor niet-leveranciers.
Retail media wordt gezien als het nieuwe advertising-medium en ook mediabureaus richten massaal retail media-afdelingen op. Merken die niet in de betreffende winkel liggen staan ook nog niet in de rij om op de retail media netwerken te adverteren. Marvin belicht de uitdagingen die er zijn om echt aansluiting te vinden op die markt van non-endemic advertising.
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
Bba 2204 fin mgt week 4 cashflow & financial planning
1. BBA 2204 FINANCIAL MANAGEMENT
Cashflow
Cashflow
and
and
Financial Planning
Financial Planning
by
Stephen Ong
Visiting Fellow, Birmingham City
University Business School, UK
Visiting Professor, Shenzhen
3. Learning Goals
1. Understand tax depreciation procedures and the effect of
depreciation on the firm’s cash flows.
2. Discuss the firm’s statement of cash flows, operating cash
flow, and free cash flow.
3. Understand the financial planning process, including longterm (strategic) financial plans and short-term (operating)
financial plans.
4. Discuss the cash-planning process and the preparation,
evaluation, and use of the cash budget.
5. Explain the simplified procedures used to prepare and evaluate
the pro forma income statement and the pro forma balance
sheet.
6. Evaluate the simplified approaches to pro forma financial
statement preparation and the common uses of pro forma
statements.
4. Analyzing the Firm’s Cash Flow
• Cash flow (as opposed to accounting “profits”)
is the primary ingredient in any financial
valuation model.
• From an accounting perspective, cash flow is
summarized in a firm’s statement of cash flows.
• From a financial perspective, firms often focus
on both operating cash flow, which is used in
managerial decision-making, and free cash flow,
which is closely monitored by participants in the
capital market.
4-4
5. Depreciation
• Depreciation is the portion of the costs of
fixed assets charged against annual revenues
over time.
• Depreciation for tax purposes is determined
by using the modified accelerated cost
recovery system (MACRS).
• On the other hand, a variety of other
depreciation methods are often used for
reporting purposes.
4-5
6. Depreciation: An Example
∗Baker Corporation acquired a new machine at a
cost of $38,000, with installation costs of $2,000.
When the machine is retired from service, Baker
expects that it will sell it for scrap metal and
receive $1,000.
∗What is the depreciable value of the machine?
∗ Regardless of its expected salvage value, the
depreciable value of the machine is $40,000: $38,000
cost + $2,000 installation cost.
4-6
7. Depreciation: Depreciable Value
and Depreciable Life
• Under the basic MACRS procedures, the
depreciable value of an asset is its full cost,
including outlays for installation.
• No adjustment is required for expected salvage
value.
• For tax purposes, the depreciable life of an asset
is determined by its MACRS recovery
predetermined period.
• MACRS property classes and rates are shown in
Table 4.1 and Table 4.2 on the following slides.
4-7
9. Table 4.2 Rounded Depreciation
Percentages by Recovery Year Using
MACRS for First Four Property Classes
4-9
10. Depreciation: An Example
∗Baker Corporation acquired, for an installed cost of
$40,000, a machine having a recovery period of 5
years. Using the applicable MACRS rates, the
depreciation expense each year is as follows:
4-10
11. Developing the Statement of
Cash Flows
• The statement of cash flows summarizes the firm’s cash
flow over a given period of time.
• Firm’s cash flows fall into three categories:
∗ Operating flows: cash flows directly related to sale
and production of the firm’s products and services.
∗ Investment flows: cash flows associated with
purchase and sale of both fixed assets and equity
investments in other firms.
∗ Financing flows: cash flows that result from debt and
equity financing transactions; include incurrence and
repayment of debt, cash inflow from the sale of stock,
and cash outflows to repurchase stock or pay cash
dividends.
4-11
16. Table 4.6 Baker Corporation Statement
of Cash Flows ($000) for the Year Ended
December 31, 2012
4-16
17. Interpreting Statement of
Cash Flows
• The statement of cash flows ties the balance sheet at
the beginning of the period with the balance sheet at
the end of the period after considering the
performance of the firm during the period through
the income statement.
• The net increase (or decrease) in cash and
marketable securities should be equivalent to the
difference between the cash and marketable
securities on the balance sheet at the beginning of
the year and the end of the year.
4-17
18. Operating Cash Flow
• A firm’s operating Cash Flow (OCF) is the cash flow
a firm generates from normal operations—from the
production and sale of its goods and services.
• OCF may be calculated as follows:
NOPAT = EBIT × (1 – T)
OCF = NOPAT + Depreciation
OCF = [EBIT × (1 – T)] + Depreciation
19. Operating Cash Flow (cont.)
• Substituting for Baker Corporation, we get:
OCF = [$370 × (1 – .40)] + $100 = $322
• Thus, we can conclude that Baker’s
operations are generating positive
operating cash flows.
4-19
20. Free Cash Flow
• Free cash flow (FCF) is the amount of cash flow
available to investors (creditors and owners) after the
firm has met all operating needs and paid for
investments in net fixed assets (NFAI) and net
current assets (NCAI).
FCF = OCF – NFAI – NCAI
• Where:
NFAI = Change in net fixed assets + Depreciation
NCAI = Change in CA – Change in (A/P + Accruals)
4-20
21. Free Cash Flow (cont.)
• Using Baker Corporation we get:
NFAI = [($1,200 – $1,000) + $100] = $300
NCAI = [($2,000 – $1,900) + ($800 - $700)] = $0
FCF = $322 – $300 – $0 = $22
• Thus, the firm generated adequate cash flow to
cover all of its operating costs and investments
and had free cash flow available to pay
investors.
4-21
22. Focus on Practice
∗ Free Cash Flow at Cisco Systems
∗ On May 13, 2010, Cisco Systems reported earnings per share of
$0.42 for the most recent quarter, ahead of the expectations of
Wall Street experts who had projected EPS of $0.39.
∗ In subsequent analysis, one analyst observed that of the three
cents by which Cisco beat the street’s forecast, one cent could be
attributed to the fact that the quarter was 14 weeks rather than
the more typical 13 weeks. Another penny was attributable to
unusual tax gains, and the third was classified with the somewhat
vague label, “other income.”
∗ Free cash flow is often considered a more reliable measure of a
company’s income than reported earnings. What are some possible
ways that corporate accountants might be able to change their
4-22 earnings to portray a more favorable earnings statement?
23. The Financial Planning Process
• The financial planning process begins with
long-term, or strategic, financial plans that in turn
guide the formulation of short-term, or operating,
plans and budgets.
• Two key aspects of financial planning are cash
planning and profit planning.
∗ Cash planning involves the preparation of the firm’s
cash budget.
∗ Profit planning involves preparation of pro forma
statements.
24. The Financial Planning Process:
Long-Term (Strategic) Financial Plans
• Long-term (strategic) financial plans lay out a
company’s planned financial actions and the
anticipated impact of those actions over periods
ranging from 2 to 10 years.
• Firms that are subject to high degrees of operating
uncertainty, relatively short production cycles, or
both, tend to use shorter planning horizons.
• These plans are one component of a company’s
integrated strategic plan (along with production
and marketing plans) that guide a company
toward achievement of its goals.
4-24
25. The Financial Planning Process:
Long-Term (Strategic) Financial Plans
• Long-term financial plans consider a
number of financial activities including:
∗ Proposed fixed asset investments
∗ Research and development activities
∗ Marketing and product development
∗ Capital structure
∗ Sources of financing
• These plans are generally supported by a
series of annual budgets and profit plans.
4-25
26. Focus on Ethics
∗ How Much Is a CEO Worth?
4-26
∗ Bob Nardelli abruptly resigned his position as Home Depot CEO
on
January 3, 2007.
∗ Nardelli’s total severance package amounted to $210 million,
including
$55.3 million of life insurance coverage, reimbursement of $1.3
million of personal taxes related to the life insurance, $50,000
to cover his legal fees, $33.8 million in cash due July 3, 2007, an
additional $18 million over 4 years for abiding by the terms of
the deal, and the balance of the package from accelerated
vesting of stock options.
∗ In addition, Nardelli and his family would receive health-care
benefits from the company for the next 3 years.
∗ What are some possible activities that Nardelli must avoid in
order to reap the additional $18 million over 4 years?
27. The Financial Planning Process:
Short-Term (Operating) Financial Plans
• Short-term (operating) financial plans specify
short-term financial actions and the anticipated
impact of those actions.
• Key inputs include the sales forecast and other
operating and financial data.
• Key outputs include operating budgets, the cash
budget, and pro forma financial statements.
• This process is described graphically on the
following slide.
4-27
29. The Financial Planning Process:
Short-Term (Operating) Financial Plans
4-29
• As indicated in the previous exhibit, short-term
financial planning begins with a sales forecast.
• From this sales forecast, production plans are
developed that consider lead times and raw material
requirements.
• From the production plans, direct labour, factory
overhead, and operating expense estimates are
developed.
• From this information, the pro forma income statement
and cash budget are prepared—ultimately leading to
the development of the pro forma balance sheet.
30. Personal Finance Example
∗ First step – define your goals.
4-30
∗ Short-term (1 year)
∗ Intermediate-term (2–5 years)
∗ Long-term (6+ years)
∗ Each goal should be clearly defined and have a
priority, time frame, and cost estimate.
∗ For example, a college senior’s intermediate-term
goal in 2012 might include earning a master’s
degree at a cost of $40,000 by 2012, and his or
her long-term goal might be to buy a
condominium at a cost of $125,000 by 2016.
31. Cash Planning: Cash Budgets
• The cash budget or cash forecast is a
statement of the firm’s planned inflows and
outflows of cash that is used to estimate its
short-term cash requirements.
• Typically, the cash budget is designed to
cover a 1-year period, divided into smaller
time intervals.
• The more seasonal and uncertain a firm’s cash
flows, the greater the number of intervals.
4-31
32. Cash Planning: Cash Budgets (cont.)
• A sales forecast is a prediction of the sales activity
during a given period, based on external and/or internal
data.
• The sales forecast is then used as a basis for estimating
the monthly cash flows that will result from projected
sales and from outlays related to production, inventory,
and sales.
• The sales forecast may be based on an analysis of
external data, internal data, or a combination of the two.
4-32
∗ An external forecast is a sales forecast based on the
relationships observed between the firm’s sales and certain key
external economic indicators.
∗ An internal forecast is a sales forecast based on a buildup, or
consensus, of sales forecasts through the firm’s own sales
channels.
33. Table 4.7 The General Format
of the Cash Budget
4-33
34. Cash Planning: Cash Budgets
An Example: Coulson Industries
∗Coulson Industries, a defence contractor, is
developing a cash budget for October, November,
and December. Coulson’s sales in August and
September were $100,000 and $200,000
respectively. Sales of $400,000, $300,000 and
$200,000 have been forecast for October,
November, and December. Historically, 20% of the
firm’s sales have been for cash, 50% have been
collected after 1 month, and the remaining 30%
after 2 months. In December, Coulson will receive a
$30,000 dividend from stock in a subsidiary.
4-34
35. Table 4.8 A Schedule of Projected Cash
Receipts for Coulson Industries ($000)
4-35
36. Cash Planning: Cash Budgets
An Example: Coulson Industries (cont.)
∗Coulson has also gathered the relevant information
for the development of a cash disbursement
schedule. Purchases will represent 70% of sales—
10% will be paid immediately in cash, 70% is paid the
month following the purchase, and the remaining
20% is paid two months following the purchase. The
firm will also expend cash on rent, wages and
salaries, taxes, capital assets, interest, dividends, and
a portion of the principal on its loans. The resulting
disbursement schedule thus follows.
4-36
37. Table 4.9 A Schedule of Projected Cash
Disbursements for Coulson Industries ($000)
4-37
38. Cash Planning: Cash Budgets
An Example: Coulson Industries (cont.)
∗The Cash Budget for Coulson Industries can be
derived by combining the receipts budget with the
disbursements budget. At the end of September,
Coulson’s cash balance was $50,000, notes
payable was $0, and marketable securities balance
was $0. Coulson also wishes to maintain a
minimum cash balance of $25,000. As a result, it
will have excess cash in October, and a deficit of
cash in November and December. The resulting
cash budget follows.
4-38
39. Table 4.10 A Cash Budget for
Coulson Industries ($000)
4-39
40. Evaluating the Cash Budget
• Cash budgets indicate the extent to which cash
shortages or surpluses are expected in the months
covered by the forecast.
• The excess cash of $22,000 in October should be
invested in marketable securities. The deficits in
November and December need to be financed.
41. Personal Finance Example
• Because individuals receive only a finite amount of
income (cash inflow) during a given period, they need to
prepare budgets in order to make sure they can cover
their expenses (cash outflows) during the period.
4-41
42. Coping with Uncertainty in
the Cash Budget
•
One way to cope with cash budgeting uncertainty
is to prepare several cash budgets based on
several forecasted scenarios (e.g., pessimistic,
most likely, optimistic).
optimistic
• From this range of cash flows, the financial
manager can determine the amount of financing
necessary to cover the most adverse situation.
• This method will also provide a sense of the
riskiness of alternatives.
• An example of this sort of “sensitivity analysis” for
Coulson Industries is shown on the following
slide.
43. Table 4.11 A Scenario Analysis of Coulson
Industries’ Cash Budget ($000)
4-43
44. Profit Planning:
Pro Forma Statements
• Pro forma financial statements are projected, or
forecast, income statements and balance sheets.
• The inputs required to develop pro forma
statements using the most common approaches
include:
∗ Financial statements from the preceding year
∗ The sales forecast for the coming year
∗ Key assumptions about a number of factors
• The development of pro forma financial
statements will be demonstrated using the
financial statements for Vectra Manufacturing.
4-44
45. Table 4.12 Vectra Manufacturing’s
Income Statement for the Year Ended
December 31, 2012
4-45
47. Table 4.14 2010 Sales Forecast
for Vectra Manufacturing
4-47
48. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 1: Start with a Sales Forecast (cont.)
∗ The previous sales forecast is based on an
increase in price from $20 to $25 per unit for
Model X and from $40 to $50 per unit for
Model Y.
∗ These increases are required to cover
anticipated increases in various costs,
including labour, materials, & overhead.
4-48
49. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 2: Preparing the Pro Forma Income Statement
∗ A simple method for developing a pro forma income
statement is the percent-of-sales method.
∗ This method starts with the sales forecast and then
expresses the cost of goods sold, operating expenses,
interest expense, and other accounts as a percentage of
projected sales.
∗ Using the Vectra example, the easiest way to do this is to
recast the historical income statement as a percentage of
sales.
4-49
50. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 2: Preparing the Pro Forma Income Statement
(cont.)
∗ By using dollar values taken from Vectra’s 2012 income
statement (Table 4.12), we find that these percentages are
4-50
51. Table 4.15 A Pro Forma Income Statement, Using the
Percent-of-Sales Method, for Vectra Manufacturing for
the Year Ended December 31, 2013
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52. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 2: Preparing the Pro Forma Income Statement
(cont.)
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∗ Clearly, some of the firm’s expenses will increase with
the level of sales while others will not.
∗ the use of past cost and expense ratios generally tends to
understate profits when sales are increasing. (Likewise,
it tends to overstate profits when sales are decreasing.)
∗ The best way to generate a more realistic pro forma
income statement is to segment the firm’s expenses into
fixed and variable components, as illustrated in the
following example.
53. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 3: Preparing the Pro Forma Balance Sheet
∗ The judgmental approach is a simplified
approach for preparing the pro forma balance sheet
under which the firm estimates the values of
certain balance sheet accounts and uses its external
financing as a balancing, or “plug,” figure.
∗ To apply this method to Vectra Manufacturing, a
number of simplifying assumptions must be made.
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54. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 3: Preparing the Pro Forma Balance Sheet
(cont.)
1.
2.
3.
4.
5.
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A minimum cash balance of $6,000 is desired.
Marketable securities will remain at their current level of
$4,000.
Accounts receivable will be approximately $16,875 which
represents 45 days of sales (about 1/8th of a year) on average
[(45/365) × $135,000].
Ending inventory will remain at about $16,000. 25% ($4,000)
represents raw materials and 75% ($12,000) is finished goods.
A new machine costing $20,000 will be purchased. Total
depreciation will be $8,000. Adding $20,000 to existing net fixed
assets of $51,000 and subtracting the $8,000 depreciation yields
a net fixed assets figure of $63,000.
55. Profit Planning: Pro Forma
Financial Statements (cont.)
∗ Step 3: Preparing the Pro Forma Balance Sheet
(cont.)
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6. Purchases will be $40,500 which represents 30% of annual
sales (30% × $135,000). Vectra takes about 73 days to pay
on its accounts payable. As a result, accounts payable will
equal $8,100 [(73/365) × $40,500].
7. Taxes payable will be $455 which represents one-fourth of
the 1998 tax liability.
8. Notes payable will remain unchanged at $8,300.
9. There will be no change in other current liabilities, longterm debt, and common stock.
10. Retained earnings will change in accordance with the pro
forma income statement.
56. Table 4.16 A Pro Forma Balance Sheet,
Using the Judgmental Approach, for
Vectra Manufacturing (December 31, 2013)
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57. Evaluation of Pro Forma
Statements
• The major weaknesses of the approaches to pro
forma statement development outlined above lie in
two assumptions:
∗ That the firm’s past financial performance will be
replicated in the future
∗ That certain variables (such as cash, accounts
receivable, and inventories) can be forced to take on
certain “desired” values.
• These assumptions cannot be justified solely on the
basis of their ability to simplify the calculations
involved.
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58. Evaluation of Pro Forma
Statements (cont.)
∗However pro forma statements are prepared, analysts must
understand how to use them to make financial decisions.
∗ Financial managers and lenders can use pro forma statements to
analyze the firm’s inflows and outflows of cash, as well as its
liquidity, activity, debt, profitability, and market value.
∗ Various ratios can be calculated from the pro forma income
statement and balance sheet to evaluate performance.
∗ Cash inflows and outflows can be evaluated by preparing a pro
forma statement of cash flows.
∗ After analyzing the pro forma statements, the financial manager
can take steps to adjust planned operations to achieve short-term
financial goals.
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59. Review of Learning Goals
Understand tax depreciation procedures and the effect of
depreciation on the firm’s cash flows.
•Depreciation is an important factor affecting a firm’s cash flow.
An asset’s depreciable value and depreciable life are determined
by using the MACRS standards in the federal tax code.
Discuss the firm’s statement of cash flows, operating cash
flow, and free cash flow.
∗ The statement of cash flows is divided into operating, investment,
and financing flows. It reconciles changes in the firm’s cash flows
with changes in cash and marketable securities for the period.
From a strict financial point of view, a firm’s operating cash flow
is defined to exclude interest. Of greater importance is a firm’s free
cash flow, which is the amount of cash flow available to creditors
4-59 and owners.
60. Review of Learning Goals (cont.)
Understand the financial planning process, including long-term
(strategic) financial plans and short-term (operating) financial plans.
∗The two key aspects of the financial planning process are cash planning and profit
planning. Long-term (strategic) financial plans act as a guide for preparing shortterm (operating) financial plans. Long-term plans tend to cover periods ranging
from 2 to 10 years; short-term plans most often cover a 1- to 2-year period.
Discuss the cash-planning process and the preparation, evaluation,
and use of the cash budget.
∗The cash-planning process uses the cash budget, based on a sales forecast, to
estimate short-term cash surpluses and shortages. The cash budget nets cash
receipts and disbursements for each period to calculate net cash flow. Ending cash
is estimated by adding beginning cash to the net cash flow. By subtracting the
desired minimum cash balance from the ending cash, the firm can determine
required total financing or the excess cash balance.
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61. Review of Learning Goals (cont.)
Explain the simplified procedures used to prepare and evaluate
the pro forma income statement and the pro forma balance
sheet.
∗A pro forma income statement can be developed by
calculating past percentage relationships between certain cost
and expense items and the firm’s sales and then applying these
percentages to forecasts.
∗Under the judgmental approach, the values of certain balance
sheet accounts are estimated and the firm’s external financing is
used as a balancing, or “plug,” figure.
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62. Review of Learning Goals (cont.)
Evaluate the simplified approaches to pro forma financial
statement preparation and the common uses of pro forma
statements.
∗Simplified approaches for preparing pro forma statements
assume that the firm’s past financial condition is an accurate
indicator of the future. Pro forma statements are commonly
used to forecast and analyze the firm’s level of profitability
and overall financial performance so that adjustments can
be made to planned operations to achieve short-term
financial goals.
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63. Further Reading
∗ Gitman, Lawrence J. and Zutter ,Chad
J.(2013) Principles of Managerial
Finance, Pearson,13th Edition
∗ Brooks,Raymond (2013) Financial
Management: Core Concepts ,
Pearson, 2th edition
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