Deck 12: Forecasting Financial Statements

Question 1

To forecast future performance, we should first create a set of financial statements that reflects items we expect to persist (continue).

Answer 1

True

Question 2

The usual financial statement forecasting process is completed in the following order: balance sheet, income statement, statement of cash flows.

Answer 2

False

Question 3

Forecasting future revenues includes revenue growth from mergers and acquisitions.

Answer 3

True

Question 4

Calculating sales estimates, derived from an estimate of the sales growth rate, is how the forecasting process begins.

Question 5

To forecast property, plant, and equipment (PPE) we increase the prior year's balance by estimated CAPEX and reduce the estimate by forecasted depreciation expense.

Question 6

The forecasting process assumes that the cash on the balance sheet is a plug.

Question 7

The forecasted statement of cash flows uses either the forecasted income statement or the balance sheet.

Question 8

Forecasted depreciation expense, commonly estimated as: [(Current year depreciation expense / Prior year PPE, net) x Current year PPE, net], is added back to net income in the cash flow from operating activities section of the Statement of Cash Flows.

Question 9

The parsimonious projection method relies on sales growth, net operating profit margin (NOPM), and asset turnover (AT) to project net operating profit after tax and net operating assets.

Question 10

The parsimonious projection method is the more efficient method for projecting property, plant and equipment.

Question 11

Which of the following is not a typical adjustment made to the income statement for projection purposes?

A) Adjusting net income for perceived under- or over-accruals
B) Adjusting revenues to only include organic revenue growth
C) Separating operating and non-operating items
D) Removing transitory items such as restructuring charges
E) None of the above

Question 12

Ashbury Corporation reports 2016 and 2017 total revenues of $90.0 million and $100.8 million respectively. If we expect prior growth to persist, we would forecast a revenue growth rate of:

A) 15%
B) 12%
C) 24%
D) 9%
E) None of the above

Question 13

Following are financial statement numbers and ratios for Snap-On Incorporated for the year ended December 28, 2016 (in millions).
If we expected revenue growth of 5% in the next year, what would projected revenue be for the year ended December 30, 2017?

A) $3,567.8 million
B) $3,551.0 million
C) $3,898.9 million
D) $3,713.2 million
E) None of the above

Question 14

Following are financial statement numbers and ratios for Lockheed Martin Corp. for the year ended December 31, 2016. If we expected revenue growth of 3.5% in the next year, what would projected revenue be for 2017?

A) $48,901.7 million
B) $48,240.2 million
C) $47,248.0 million
D) $51,169.6 million
E) None of the above

Question 15

Payton Inc. reports in its 2017 annual report 10-K, sales of $8,180 million and cost of goods sold of $3,272 million. For next year, you project that sales will grow by 3% and that cost of goods sold percentage will be 1 percentage point higher.
Projected cost of goods sold for 2018 will be:

A) $3,304 million
B) $3,813 million
C) $3,454 million
D) $3,370 million
E) There is not enough information to determine the amount.

Question 16

Hudson Company reports in its 2017 10-K, sales of $332 million, long-term debt of $27 million, and interest expense of $980,000.
If sales are projected to increase by 4% next year, projected interest expense for 2018 will be:

A) $1,019,200
B) $ 908,000
C) $1,007,000
D) $ 980,000
E) None of the above

Question 17

Reed Corporation reports 2017 sales of $415 million, income before income taxes of $122.3 million and tax expense of $35.9 million.
If sales are projected to increase by 4% next year, projected tax expense for 2018 will be:

A) $35.9 million
B) $37.3 million
C) $40.8 million
D) $42.3 million
E) There is not enough information to determine the amount.

Question 18

When forecasting balance sheet financials, an unusually high forecasted cash balance suggests which of the following?

A) Sales are projected to increase in coming years.
B) The company will need to sell additional stock.
C) The company is generating a lot of cash, most typically from operations.
D) Account receivables have dipped to an unacceptable level.
E) None of the above

Question 19

CVS Health Corporation reported sales of $177,526 million, property, plant and equipment (PPE), net of $10,175 million, and capital expenditures of $2,224 million in 2016.
If sales are projected to increase 4% per year over the next five years, what is the projected capital expenditures (purchases of new PPE) for 2017?

A) $7,951 million
B) $3,313 million
C) $2,224 million
D) $7,775 million
E) $2,400 million

Question 20

The 2016 financial statements of CVS Health Corporation reported sales of $177,526 million and accounts receivable of $12,164 million.
If sales are projected to increase 4% next year, what is the projected accounts receivable balance for 2017?

A) $12,164 million
B) $12,739 million
C) $12,998 million
D) $13,016 million
E) $13,529 million

Question 21

Fey and Company has a projected balance sheet that includes the following accounts. What is the projected cash balance?

A) $0
B) $566,000
C) $344,000
D) $1,914,000
E) None of the above

Question 22

Ogden Corporation has a projected balance sheet that includes the following accounts. What is the projected cash balance?

A) $0
B) $487,000
C) $560,000
D) $576,000
E) None of the above

Question 23

When forecasting the balance sheet, what happens when the initial balance sheet yields estimated total assets greater than the sum of total liabilities and equity?

A) The company will need additional financing from external sources.
B) The company will not be able to pay for expenses in the future.
C) The company projected a loss.
D) The company has negative stockholders' equity.
E) None of the above

Question 24

Which of the following is a common method for forecasting nonoperating assets?

A) Use prior-year common-sized balance sheet ratio
B) Apply forecasted sales growth rate to historic balance
C) Assume no change in the account balance
D) Plug the amount based on other balance sheet accounts
E) None of the above

Question 25

In its 2017 annual report, Manchester Corp. reports the following:
If revenue is projected to increase by 8% in 2018, projected 2018 capital expenditures would be:

A) $12,150
B) $12,000
C) $12,960
D) $0
E) None of the above

Question 26

When projecting the statement of cash flows, the following represent operating cash outflows (check all that apply):

A) Decrease in accounts receivable.
B) Increase in inventory
C) Decrease in accounts payable
D) Increase in wages payable
E) Increase in property, plant, and equipment

Question 27

Which of the following describes the analytic process to determine the depreciation expense included in the forecasted statement of cash flows?

A) Depreciation is a non-cash expense, thus it is not included in the statement of cash flows.
B) The year-over-year change in property, plant and equipment on the balance sheet is equal to depreciation expense.
C) Property, plant, and equipment from the prior year multiplied by depreciation rate reported in the footnotes.
D) Gross property, plant, and equipment from the prior year + Capital expenditures - Forecasted gross property, plant, and equipment
E) None of the above

Question 28

In its 2017 annual report, Allen Company reports the following (in thousands):
If revenue growth is projected to be 5%, the 2018 forecasted depreciation expense to be added back on the statement of cash flows is:

A) $1,935 thousand
B) $2,147 thousand
C) $1,766 thousand
D) $2,065 thousand
E) None of the above

Question 29

In its 2016 annual report, Lockheed Martin reported net earnings of $5,302 million and dividends paid of $2,048 million. Your forecast of net income for Lockheed Martin for 2017 is $5,504 million.
What are projected dividends for the company for 2017?

A) $2,126 million
B) $2,048 million
C) $2,307 million
D) $2,069 million
E) None of the above

Question 30

In its 2017 annual report, Liberty Company reported sales of $1,200 million. If you anticipate that sales will grow by 4% each year for the foreseeable future, what will 2021 forecasted sales be?

A) $1,403.8 million
B) $1,248.0 million
C) $1,349.8 million
D) $1,179.7 million
E) None of the above

Question 31

Which of the following variables is/are not required input(s) for parsimonious multiyear forecasting?

A) Net operating asset turnover (NOAT)
B) Net operating profits margin (NOPM)
C) Sales growth
D) Net nonoperating assets (NNO)
E) All of the above are required inputs

Question 32

Following are financial statement numbers and ratios for CVS Health Corporation for the year ended December 31, 2016. If we anticipate a 5% sales growth in 2017, what is the company's projected net operating profit after tax (NOPAT) for 2017?

A) $61,533 million
B) $ 6,710 million
C) $ 6,391 million
D) $64,499 million
E) None of the above

Question 33

Following are financial statement numbers and ratios for CVS Health Corporation for the year ended December 31, 2016. If we anticipate a 5% sales growth in 2017, what is the company's projected net operating assets (NOA) for 2017?

A) $61,005 million
B) $ 6,710 million
C) $ 6,391 million
D) $64,056 million
E) None of the above

Question 34

Briefly describe how analysts typically forecast each of the following items: Sales, Cost of Sales, Inventory, and Tax expense.

Question 35

Innovative Components, Inc. reported the following income statement data for 2013-2017.
What would be an appropriate sales growth rate based on the historical data?

Question 36

Barrington Corporation reported net revenues of $50,139 million and $46,859 million for fiscal years 2017 and 2016 respectively. The company reported a gross profit margin of 52.5% in 2017.
Forecast sales and cost of goods sold for Barrington Corporation for 2018.

Question 37

Assume Intuit Inc. reports the following revenues for the fiscal year ended July 31, 2014 through 2016.

a. What is Intuit's total net revenue growth during 2016?
b. Compare the growth rates for Product versus Service revenues in 2016.
c. How would these growth rates affect your projection of Intuit's 2017 income statement?

Question 38

Fuller Inc. reported the following income statement data for 2013-2017.
What would be an appropriate tax rate for forecasting 2018 financial statements?

Question 39

CVS Health Corporation reported 2016 net sales of $177,526 million and cost of revenues of $148,669 million. Forecast the company's 2017 gross profit assuming a 3% sales-growth rate.

Question 40

Cambridge Company reported 2017 net sales of $2,197,600 and a gross profit margin (in percentage terms) of 36%. The company anticipates that sales will increase by 2% in 2018 but that the gross profit margin will be the same as 2017.
Forecast the company's 2018 cost of sales.

Question 41

Oakmont Corporation reported the following 2017 income statement (in millions):
Forecast the 2018 income statement for Oakmont Corporation assuming a 3% increase in net sales and a continuation of the 2017 gross profit margin and percentage relation to net sales for each of the other expenses except for interest expense which will remain the same.

Question 42

Dexter Company reported the following 2017 income statement
Forecast Dexter's income statement assuming a 5% increase in sales, a 37% effective tax rate, and a continuation of the 2017 percentage relation to net sales for expenses except for interest where the company projects no change.

Question 43

Haskins Inc. reported the following 2017 income statement ($ thousands):
Forecast 2018 operating income assuming a 2% increase in sales. Assume that the 2017 percentage relation of expenses to total revenue continue to hold in 2018.

Question 44

Lockheed Martin's 2016 financial statements include the following:
Forecast accounts receivable, inventory, and accounts payable for 2017 given that sales are expected to grow by 5% in 2017.

Question 45

Snap-On Corp 2016 financial statements include the following:
Forecast accounts receivable, inventory, and accounts payable for 2017 given that sales are expected to grow by 4% in 2017.

Question 46

Benton Enterprises reports the following information.

a. What did Benton Enterprises report as Inventory in 2017?
b. Forecast Inventory for the company for 2018.

Question 47

Lockheed Martin Corporation reports property, plant and equipment, gross of $14,877 million in 2016 and $14,266 million in 2015. Sales revenue in 2016 was $47,248 million and capital expenditures were $1,063 million.
a. Forecast 2017 capital expenditures (CAPEX) for property, plant and equipment assuming sales are forecasted to grow at 5%.
b. What will be the forecasted amount for property, plant and equipment, gross, at the end of 2017?

Question 48

Hubert Inc. has a projected balance sheet that includes the following accounts.
What is the forecasted cash balance?

Question 49

Bryans Corporation has a projected balance sheet that includes the following accounts.
What is the company's forecasted cash balance?

Question 50

Aiello Corporation anticipates that sales in 2018 will grow by 5%. The company reports the following in its December 2017 financial statements:
Forecast the company's 2018 Sales, depreciation expense, and cash outflow to acquire new Property, plant and equipment.

Question 51

Jaden Enterprises reports gross property and equipment of $86.3 million in 2017 and $73.1 million in 2016. Sales revenue in 2017 was $880 million. 2017 capital expenditures were $22.0 million.
a. Forecast 2018 capital expenditures (CAPEX) for property and equipment assuming sales are forecasted to grow at 5%.
b. What will be the forecasted amount for property and equipment, gross, at the end of 2018?

Question 52

Lockheed Martin Corp. reports the following in its 2016 financial statements (in millions):

a. If you forecast sales for 2017 of $49,610 million and net earnings for 2017 of $5,461 million, what dividends would you include in the projected 2017 statement of cash flows?
b. Explain where dividends would appear in the projected 2017 statement of cash flows.

Question 53

Lexington, Inc. reports the following in its 2017 financial statements (in thousands):
Sales and net income are forecasted to grow by 5% per year.
a. What will forecasted sales be in 2018 and 2019?
b. Determine the balance in retained earnings at the end of 2018 and 2019 assuming forecasted net income is $17,556 thousand for 2018 and $18,434 thousand for 2019.

Question 54

Rockford Corporation reports the following in its 2017 financial statements (in millions):
Sales and net income are forecasted to grow by 10% per year for the next few years.
a. What will forecasted sales be in 2018 and 2019?
b. Determine the balance in retained earnings at the end of 2018 and 2019 assuming forecasted net income is $1,153 million for 2018 and $1,268 million for 2019.

Question 55

Following are financial statement numbers and ratios for Konerko Corp. for the year ended December 31, 2017 (in thousands).
What is the company's forecasted net operating profit after tax (NOPAT) for 2018 and 2019?

Question 56

Following are financial statement numbers and ratios for CVS Health Corporation for the year ended December 31, 2016.
What is the company's forecasted net operating profit after tax (NOPAT) for 2017?

Question 57

Following are financial statement numbers and ratios for CVS Health Corporation for the year ended December 31, 2016.
What is the company's forecasted net operating assets (NOA) for 2017?

Question 58

Regan Corporation reported the following 2017 income statement (in millions):
Footnotes to Regan Corporation's MD&A and financial statements disclose the following information:
1) Restructuring charges include accruals for severance packages and losses on asset write-downs. The company does not anticipate further restructuring activity.
2) A lawsuit related to product malfunctions was settled and ongoing lawsuits will not materially affect future income.
3) Changes to the company's pension plan resulted in a one-time gain.
4) Securities were sold during the year to fund the litigation settlement.
5) Tax-law changes resulted in nondeductibility of certain expenses. The company anticipates a 37% tax rate for 2018 onward.
Required:
What adjustments would you make to Regan's income statement before you started to forecast earnings for 2018? Prepare an adjusted income statement.

Question 59

Following are the financial statements of Snap-On Inc. for the year ended December 31, 2016. Prepare a forecasted income statement and balance sheet for the company for the next year.
Continued next page
To forecast the financial statements, make the following assumptions. For accounts that are not included in the list below, assume that the amount will not change for the forecasted year.

Question 60

Following are the financial statements of CVS Health Corporation for the year ended December 31, 2016. Prepare a forecasted income statement and balance sheet for the company for the next year.
Continued next page
To forecast the financial statements, make the following assumptions. For accounts that are not included in the list below, assume that the amount will not change for the forecasted year.

Question 61

Following are the financial statements of Lockheed Martin Corporation for the year ended December 31, 2016. Prepare a forecasted income statement and balance sheet for the company for the next year.
Continued next page
Forecast the financial statements, making the following assumptions. For accounts that are not included in the list below, assume that the amount will not change for the forecasted year.

Question 62

Following are the forecasted income statement and balance sheet for Lockheed Martin Corporation for the year ended December 31, 2017. Prepare a forecasted statement of cash flows for the company for 2017.
Continued next page
The following assumptions were used to develop the forecasted financial statements:

Question 63

Following are the forecasted income statement and balance sheet for Snap-On Corporation for the year ended December 31, 2017. Prepare a forecasted statement of cash flows for the company for 2017.
Continued next page
The following assumptions were used to develop the forecasted financial statements:

Question 64

Following is the income statement for NetFlix Inc. for the year ended December 31, 2016. Prepare forecasted income statements for the company for 2017 and 2018.
Use the following assumptions to develop the forecasted income statements:

Question 65

Following is the balance sheet and income statement for CVS Health Corporation for the year ended December 31, 2016.
Required:
a. Calculate net operating profit after tax (NOPAT) for 2016. Assume a statutory tax rate of 37.0%.
b. Calculate net operating assets for 2016.
c. Use the parsimonious method of forecasting to project net operating profit after tax (NOPAT) and net operating assets (NOA) for 2017 and 2018. Assume that sales increase by 10% each year. Assume that net operating profit margin (NOPM) and net operating asset turnover (NOAT) remain unchanged from their 2016 levels. (Hint: Use year-end NOA rather than average NOA to compute 2016 NOA.)

Question 66

Following is financial information for Snap-On Inc. for the year ended December 31, 2016.
Assume that net operating profit margin (NOPM) and net operating asset turnover (NOAT) will remain at 2016 levels. Assume that sales will grow as follows:
Required:
Use the parsimonious method of forecasting to project net operating profit after tax (NOPAT) and net operating assets (NOA) for 2017 through 2020, inclusive.

Question 67

Following is financial information for NetFlix, Inc., for the year ended December 31, 2016 (in thousands). Use the parsimonious method of forecasting to project net operating profit after tax (NOPAT) and net operating assets (NOA) for 2017 through 2020, inclusive.
Assume that net operating profit margin (NOPM) and net operating asset turnover (NOAT) will remain at 2016 levels. Assume that sales will grow at 5% per year.
Required:
Use the parsimonious method of forecasting to project net operating profit after tax (NOPAT) and net operating assets (NOA) for 2014 through 2017, inclusive.

Question 68

Explain the difference between organic and acquired growth.

Question 69

Explain why the calculated forecasted cash balance for a company is crucial to understanding how a company will be financed in the future.

Question 70

Describe the difference between the full forecast of financial statements and the parsimonious method. When is one preferable to the other?