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Lecture 4 - Projected Financial Statements

This document discusses projected financial statements using the percent of sales method. It outlines 4 steps: 1) forecast the income statement by projecting sales, costs, and profits. 2) Forecast the statement of financial position by projecting assets, liabilities, and equity needed to support projected sales. 3) Raise any additional funds needed through borrowing, stock issuance, or a combination. 4) Consider financing costs that decrease retained earnings, such as interest expenses and dividends. It includes an illustration applying the method and calculating additional funds needed.

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96 views

Lecture 4 - Projected Financial Statements

This document discusses projected financial statements using the percent of sales method. It outlines 4 steps: 1) forecast the income statement by projecting sales, costs, and profits. 2) Forecast the statement of financial position by projecting assets, liabilities, and equity needed to support projected sales. 3) Raise any additional funds needed through borrowing, stock issuance, or a combination. 4) Consider financing costs that decrease retained earnings, such as interest expenses and dividends. It includes an illustration applying the method and calculating additional funds needed.

Uploaded by

kookie bunny
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FINANCIAL MARKETS

ACG009
THE PROJECTED
FINANCIAL STATEMENTS
LECTURE WEEK NO.
2-3
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
STEP 1. FORECAST THE INCOME STATEMENT
A. Establish a sales projection
B. Project production costs, selling & administrative
costs, and consider if there are any financial
expenses
C. Determine the net profit
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
STEP 2. FORECAST THE STATEMENT OF FINANCIAL POSITION
A. Project the assets that will be needed to support projected
sales
B. Project funds that will be spontaneously generated (funds that
arise out of normal business operations from its suppliers,
employees, and the government such as through accounts
payable, accrued wages and taxes) and by retained earnings
C. Project liability and stockholders’ equity accounts that will not
rise spontaneously with sales (notes payable, long-term bonds,
preferred and common stock)
D. Determine if additional funds will be needed (balancing figure)
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
STEP 3. RAISING THE ADDITIONAL FUNDS NEEDED
The additional funds will be raised by either borrowing from bank as
notes payable, by issuing long-term bonds, by selling new common
stock or by some combinations of these actions

STEP 4. CONSIDER FINANCING FEEDBACKS


Consideration should be given on the costs of raising funds that
decreases the retained earnings:
● additional interest expense when funds are borrowed
● the dividends that needs to be paid when funds are raised
through sale of shares of stock
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
ILLUSTRATION 1
Crum Co. expects sales to grow by 50% in 2019 and operating costs
and cost of goods sold should increase in proportion to sales. The
expected growth in sales does not require expenditures in fixed assets.
Current assets and spontaneous liabilities should increase also in
proportion to sales during 2019. Income tax rate is 40%. Sixty percent
of the Net Income is distributed as dividends to common stockholders.

The company plans to finance external funds needed as 35% Notes


payable and 65% Common stock.
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
ILLUSTRATION 1 (continuation)
The 2018 financial statement are given below:

REQUIRED: Prepare the 2019 Forecasted Financial Statements and determine the AFN
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
Answer in ILLUSTRATION 1
THE PROJECTED FINANCIAL STATEMENTS
(PERCENT OF SALES METHOD)
Answer in ILLUSTRATION 1 (continuation)
ADDITIONAL FUND NEEDED
(AFN FORMULA METHOD)
The additional fund needed (AFN) may also be computed as follows:
ADDITIONAL FUND NEEDED
(AFN FORMULA METHOD)
ILLUSTRATION 2
Using the given in Illustration 1, the computation of AFN using the formula
method is as follows:
REFERENCES / ADDITIONAL READINGS
Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony
B. Financial Management (2019-2020 Edition).
GIC Enterprises & Co. Inc.

Brigham, Eugene F. & Houston, Joel F.


Fundamentals of Financial Management. (12th
edition). South-Western Cengage Learning.

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