Corporate financeLesson 2 of 3 in the course Financial Forecasting

Forecasting Income Statements and Balance Sheets from Operating Assumptions

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

A complete income statement forecast starts with the sales forecast. Historical income statements and common-size statements provide a baseline, while information about the economy, competition, product lines, and company plans helps managers revise that baseline. A common-size income statement expresses each expense as a percentage of sales, which can help estimate costs that move with revenue.

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Pro forma income statement
A forward-looking estimate of revenues, expenses, and income based on forecasts and explicit assumptions.
Net 30-day vendor terms
A payment policy Clear Lake uses to estimate accounts payable from the prior month's forecast COGS.
Unearned revenue estimate
Clear Lake estimates this balance as 50% of current-month net sales.
Cash plug limitation
A cash plug balances an initial forecast, but a cash flow forecast is needed to assess whether the implied cash is workable.
Quarterly dividends and retained earnings
Dividends reduce retained earnings in the periods when they are paid.

Quiz questions

  1. What does a balance sheet report, in contrast to an income statement?Answer: Account balances at a particular point in time.
  2. With net 90-day customer payment terms, how does Clear Lake estimate accounts receivable?Answer: By summing sales for the current month and the prior two months.
  3. During Clear Lake's busy season, what inventory target is used?Answer: Three months of future sales.
  4. How does forecast net income affect retained earnings?Answer: It increases retained earnings, while dividends reduce them.
  5. What is the purpose of using cash as a plug in a first-draft balance sheet forecast?Answer: To make total assets equal total liabilities and equity.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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