Chapter 4
Financial Planning and Forecasting
CHAPTER 4
FINANCIAL PLANNING AND
FORECASTING
ANSWERS TO QUESTIONS:
1. Deferred taxes arise because of the timing difference of some expenses as recorded for
financial reporting purposes and these same expenses as recorded for the purpose of making tax
filings. For example, most firms use accelerated depreciation for tax purposes and straight-line
2. Pro forma financial statements are financial statements that project the results of some
assumed events rather than actual events. The assumed events do not necessarily have to be
3. The percentage of sales forecasting method is a method of estimating the additional financing
that will be needed to support a given future sales level. Financial analysts should be aware that
4. A cash budget is a projection of a company’s cash receipts and disbursements over some future
period of time. Normally a worksheet is prepared, showing expected receipts and disbursements
5. The statement of cash flows can be used to estimate how much external financing a company
6. A deterministic model provides a single-number forecast of a financial variable (or variables)
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SOLUTIONS TO PROBLEMS:
1. ATCF = EAT + Depreciation + Deferred taxes
2. Midland Manufacturing Corporation
Statement of Cash Flows For the Year Ended December 31, 2016
($ millions)
Cash Flows from Operating Activities:
Net income $8.3
Adjustments to reconcile net income to net cash provided
from operating activities
Depreciation 9.5
Cash Flows from Investing Activities
Proceeds from sale of facilities or equipment 1.0
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 15.0
Net Increase (Decrease) in Cash (4.1)
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3. a. Additional
Financing = [(A/S)(S) – (CL/S)(S)] – [EAT – D]
Needed
Additional
Financing = [(7,500,000/15,000,000)(3,750,000) – (1,500,000/
Balance Sheet
as of December 31, 2017
Assets Liabilities
Cash $ 625,000 Accounts payable
Inventories 5,000,000 Total Cur. Liabilities 3,875,000
equity
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Income Statement
for the Year Ending December 31, 2017
Sales $18,750,000
Expenses, including interest and taxes 18,000,000
Selected Financial Ratios
Current ratio 2.10 times
Part b. c.
Balance Sheet
as of Dec. 31, 2017
Assets
Cash $ 600,000 $ 650,000
Accounts receivable 2,400,000 2,600,000
Liabilities and equity b. c.
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Accounts payable $1,800,000 $1,950,000
and equity
Income Statement
for Year Ending Dec. 31, 2017
Sales $18,000,000 $19,500,000
Expenses, including
interest & taxes 17,050,000 18,250,000
Selected Financial Ratios
Current ratio 2.36 2.25
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4.
Atlas Products Inc.
Cash Budget Worksheet
First Quarter, 2017
December January February March
Estimated Sales $825,000 $730,000 $840,000 $920,000
Estimated Credit Sales 770,000 690,000 780,000 855,000
Estimated Receipts:
Cash Budget
First Quarter, 2017
December January February March
Sales $825,000 $730,000 $840,000 $920,000
Projected cash balance
beginning of month $100,000 $100,000 $100,000
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