Question 1

When projecting ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.

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Question 2

Arco is an integrated manufacturer in capital-intensive industry.Nuwak manufactures more commodity-level products in the same industry at the lower end of the market and uses less capital-intensive processes.The following data describe sales and cost of products sold for both firms for Years 3 and 4.
  Industry analysts anticipate the following annual changes in sales for the next five years:
Year +1,5 percent increase; Year +2,10 percent increase; Year +3,20 percent increase; Year +4,10 percent decrease; Year +5,20 percent decrease.
Required
a.The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example,cost of products sold)by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for those two years.The analyst can then multiply the variable-cost percentage times sales to estimate the total variable cost.Subtracting the variable cost from the total cost yields an estimate of the fixed cost for that particular cost item.Follow this procedure
to estimate the manufacturing cost structure (variable cost as a percentage of sales,total variable costs,and total fixed costs)for cost of products sold for both Arco and Nuwak in Year 4.
b.Discuss the structure of manufacturing cost (that is,fixed versus variable)for each firm in light of the manufacturing process and type of product produced.
c.Using the analysts' forecasts of sales changes,compute the projected sales,cost of products sold,gross profit,and gross margin (gross profit as a percentage of sales)
of each firm for Year +1 through Year +5.
d.Why do the levels and variability of the gross margin percentages differ for these two firms for Year +1 through Year +5?

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Question 3

Analysts must develop realistic expectations for the outcomes of future business activities.
To develop these expectations,analysts build a set of _____________________________.

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Question 4

The following balance sheet and income statement pertain to Goode Corp.,using the following assumptions complete a forecasted 2013 income statement:

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Question 5

The following information about Douglas Corp.'s Accounts Receivable and Sales are presented below:
  Required:
a.Using this information,forecast Douglas Corp.'s the growth in Accounts Receivable for years 2013-2017.
b.What problem does a constant A/R turnover assumption cause?
c.Provide a solution to the problem caused by a constant A/R turnover assumption.

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Question 6

One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances.What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?

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Question 7

Techtronics is a leader in manufacturing computer chips,which is very capital-intensive.Because the production processes in computer chip manufacturing require sophisticated and rapidly changing technology,production and manufacturing assets in the chip industry tend to have relatively short useful lives.
The following summary information relates to Techtronics' property,plant,and
equipment for 2009 and 2010:
  Required
Assume that Techtronics depreciates all property,plant,and equipment using the straight-line
depreciation method and zero salvage value.Assume that Intel spends $6,000 on new
depreciable assets in Year 1 and does not sell or retire any property,plant,and equipment
during Year 1.
a.Compute the average useful life that Techtronics used for depreciation in 2010.
b.Project total depreciation expense for Year 1 using the following steps: (i)project depreciation expense for Year 1 on existing property,plant,and equipment at the end of 2010; (ii)project depreciation expense on capital expenditures in Year 1 assuming that Intel takes a full year of depreciation in the first year of service; and (iii)sum the results of (i)and (ii)to obtain total depreciation expense for Year 1.
c.Project the Year 1 ending balance in property,plant,and equipment,both at cost
and net of accumulated depreciation.

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Question 8

Glad Rags,Inc.sells women's clothes.Provided below is selected financial statement information:
  Required:
a.Compute the inventory turnover ratio for 2010.
b.Clothes,Inc.projects that sales will grow at a compound rate of 7% per year for years 2011-2013 and that the cost of goods sold to sales percentage will equal that realized in 2010.Compute the projected implied level of inventory at the end of 2011 to 2013.

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Question 9

Office Mart,Inc.sells numerous office supply products through a national distribution center.The company has focused on maintaining a cash balance equivalent to approximately 14 days of sales.Sales in 2010 amounted to $125,980,673 and the company expects growth in 2011 of 11% and in 2012 of 15%.Given this information determine Office Mart,Inc.'s projected year-end cash balance for 2011 and 2012.

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Question 10

If a firm competes in a ___________________________________ industry that the analyst expects will operate near capacity for the next few years,then price increases will

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Question 11

In comparison of 2010 to 2009 performance,Watson Company's inventory turnover decreased substantially,although sales and inventory amounts were essentially unchanged.
Required:
During a corporate meeting you heard the following managers postulate why the decreased inventory turnover ratio happened.Which statement best explains the decreased inventory turnover ratio and why?
a.The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods sold.
b.The operations manager said: The decreased inventory turnover ratio is due to increased gross profit percentage.
c.The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts receivable turnover.
d.The shipping manager said: The decreased inventory turnover ratio is due to decreased total asset turnover.

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Question 12

A firm in transition from the high growth to the mature phase of its life cycle,or a firm with significant technological improvements in its production processes,might expect increases in ______________________________ but decreases in sales prices per unit.

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Question 13

Bargains,Inc.manufactures and markets toys.Selected income statement data from 2010 and 2009 appear below:
  Required:
a.An analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost by dividing the amount of the change in the cost item between two years by the amount of the change in sales for those two years.The analyst can then multiply the variable cost percentage times sales to determine the total variable cost.Subtracting the variable cost yields the fixed cost for that particular item.Follow this procedure to determine the cost structure for costs of goods sold for Bargains,Inc.
b.Bargains,Inc.projects sales to grow at the following percentages in future years: 2011,9 percent; 2012,11 percent; 2013,15 percent.Using this information project sales,cost of goods sold and gross profit for Bargains,Inc.for 2011 to 2013.

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Question 14

Saunders Corporation manufactures consumer electronics products.Selected income statement data for 2009 and 2010 follow (amounts in millions of dollars):
  Required
a.The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example,cost of goods sold)by dividing the amount of the change in the cost item between two years by the amount of the change in sales for those two years.The analyst can then multiply total sales by the variable-cost percentage to determine the total variable cost.Subtracting the variable cost from the total cost yields the fixed cost component for that particular cost item.Follow this procedure to determine the cost structure (fixed cost plus variable cost as a percentage of sales)for cost of goods sold for Saunders.
b.Repeat requirement a.for selling and administrative expenses.
c.Saunders Corporation discloses that it expects sales to grow at the following percentages
in future years: Year 1,12 percent; Year 2,10 percent; Year 3,8 percent; Year 4,6 percent.Project sales,cost of goods sold,selling and administrative expenses,and operating income before income taxes for Saunders for Year 1 to Year 4 using the cost structure amounts derived in requirements a.and b.
d.Compute the ratio of operating income before income taxes to sales for Year 1 through Year 4.
e.Interpret the changes in the ratio computed in requirement d.in light of the expected changes in sales.

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Question 15

The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.

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Question 16

Many times an analyst will compute ending accounts receivable or inventory balances using turnover ratios.Discuss the advantage and disadvantage of using this methodology.

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Question 17

As an analyst it is important when projecting sales to make estimates about future changes in sales volume.Compare how you might make estimates about future sales value for a company in a mature industry and one in a rapidly growing industry.

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Question 18

Repair Specialists is a leading retailer of home improvement products.It operates large warehouse-style stores.Despite declining sales and difficult economic conditions in 2009 and 2010,Repair Specialists continued to invest in new stores.The following table provides summary data for Repair Specialists.
  Required
a.Use the preceding data for Repair Specialists to compute average revenues per store,
capital spending per new store,and ending inventory per store in 2010.
b.Assume that Repair Specialists will add 100 new stores by the end of Year 1.Use the data from 2010 to project Year 1 sales revenues,capital spending,and ending inventory.Assume that each new store will be open for business for an average of one-half year in Year 1.For simplicity,assume that in Year 1,Repair Specialists' sales
revenues will grow,but only because it will open new stores.

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Question 19

The first step in the forecasting game plan is to project sales and other other operating activities.Sales numbers are determined by both a volume component and price component.Projecting prices depends on factors specific to the firm and its industry that might affect demand and price elasticity.For the following types of firms discuss whether it would be likely that the firm would be able to raise future prices:
a.A firm in a capital-intensive industry that is expected to operate near capacity for the near future.
b.A firm in an industry that is expected to experience numerous technological improvements.
c.A firm with products which are transitioning from the growth to maturity phase of the product life cycle.
d.A firm that has established a well known brand name and image.

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Quiz 10: Forecasting Financial Statements