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CHAPTER 10
FORECASTING FINANCIAL STATEMENTS
Solutions to Questions, Exercises, Problems, and Teaching Notes to Cases
10.1 Relying on Accounting to Avoid Forecast Errors. This question encourages
students to think about the internal consistency in accounting and how it can help
10.2 Objective and Realistic Forecasts. In answering this question, students consider
why different parties to the financial reporting process have different incentives and
10.3 Projecting Revenues: The Effects of Volume versus Price. This question gets
students thinking about different drivers of different components of revenue growth
in a general setting. A firm’s competitive strategic advantages should help it sustain
10.4 Projecting Gross Profit: The Effects of Volume Versus Price. This question gets
students thinking about how drivers of different components of revenue growth
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10.5 Projecting Revenues, Cost of Goods Sold, and Inventory. In this exercise,
students work through the computations to project revenue, cost of goods sold, and
ending inventory for Walgreens. The data and computations follow:
Walgreens’ (data in millions) Year 2014 Year 2015 Growth Rates Year +1
10.6 The Flexible Financial Account. This question asks students to discuss how a
firm’s financial flexibility will change as the firm progresses through stages of the
10.7 Dividends as a Flexible Financial Account. This exercise asks students to
Year +1 Balance Sheet Amounts before Plugging Dividends:
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Year +1 Balance Sheet Amounts after Plugging Dividends:
10.8 Long-Term Debt as a Flexible Financial Account. This exercise asks students to
Year +1
Projected Income Statement Amounts
Year +1
Projected Balance Sheet Amounts
10.9 Store-Driven Forecasts. In this exercise, students work through the computations
to project revenue, capital expenditures, and ending inventory for The Home Depot,
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The Home Depot (data in mil-
lions except number of stores) 2014 2015 Year +1 Computations
10.10 Projecting Property, Plant, and Equipment. This exercise gets students working
a. The average useful life that Intel used in 2015 for depreciation was 10.43 years,
b. Depreciation expense for Year +1 on (1) existing property, plant, and equipment
at the end of 2015; (2) capital expenditures in Year +1 assuming that there is
Intel (data in millions) 2014 2015 Year +1 Computations
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10.11 Identifying the Cost Structure and Projecting Gross Margins for Capital-
Intensive, Cyclical Businesses.
AK Steel:
Variable Cost per Dollar of Sales = ($4,554 – $3,887)/($5,217 – $4,042) = $0.568
percentage of sales for AK Steel.
c. (amounts in millions)
AK Steel
Year +1 Year +2 Year +3 Year +4 Year +5
Nucor
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d. The average gross margin of AK Steel is 16.7%, with a standard deviation of
10.12 Identifying the Cost Structure (amounts in billions).
a. Change in Cost of Goods Sold: (¥5,275 – ¥5,140) …………………… ¥135
c. and d. Year +1 Year +2 Year +3 Year +4
e. The percentage of operating income before income taxes to sales increases over
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
response to the projected declining rate of growth in sales. Such adjustments
would change the cost structure computed in Requirements a and b above.
10.13 Smoothing Changes in Accounts Receivable (amounts in millions).
a. Hasbro accounts receivable turnover: $4,448/[0.5($1,218 + $1,095)] = 3.85.
b.
Percentage
Accounts Average Ending Accounts Receivable Change in
Receivable Accounts Beginning End of Accounts
Sales Turnover Receivable of Year Year Receivable
c. The changes in receivables exhibit the sawtooth pattern described in the chapter.
d. The increase in accounts receivable from $1,218 million at the end of 2015 to
Ending Accounts Receivable
e. An increase in accounts receivable from $1,218 million to $1,991 million over
four years represents a compound annual rate of growth of 13.07%.
Ending Accounts Receivable
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The difference in growth rate in Requirements d and e results from using an
ending accounts receivable date that is an upward “sawtooth” (Requirement c)
and a downward “sawtooth” (Requirement d). Observe from Requirement b that
accounts receivable increased 12.1% during Year +4 (a down “sawtooth”) but
increased 13.8% during Year +5 (an up “sawtooth”).
f. Turnover based on year-end accounts receivable balance: $4,448/$1,218 = 3.65
Accounts Accounts Receivable Change in
Receivable Beginning End of Accounts
Sales Turnover of Year Year Receivable
10.14 Smoothing Changes in Inventories (amounts in thousands).
a. Barnes & Noble inventory turnover: $4,197/[0.5($1,235 + $1,293)] = 3.32
b. Cost of Inventories Percentage
Goods Inventory Average Beginning End of Change in
Sold Turnover Inventories of Year Year Inventories
c. The above projections indicate an increase in inventories from $1,293 to $2,349
Ending Inventories
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d. Barnes & Noble inventories actually increased from $1,235 at the end of 2014
Ending Inventories Implied Turnover
This exercise demonstrates that simply assuming that past growth rates will
10.15 Identifying Financial Statement Relations.
a. Retained Earnings, Beginning of Year +1 ……………………………….. $ 21,700
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g. Retained Earnings, End of Year +2 ………………………………………… $ 23,700
Net Income for Year +3 ………………………………………………………… 4,206
Inventories, End of Year +3 …………………………………………………… (10,711)
Purchase of Inventories during Year +3 ………………………………….. $ 47,087
Integrative Case 10.1: Walmart
This case provides students with an extensive integrated exercise in building financial
statement forecast models. The case allows students to focus on building the models
website. Go to the instructor’s resources page at www.cengage.com/accounting/wahlen.
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b. The increasing balances in cash through Year +5 result because cash flow from
excess cash creates agency problems, in which the cash may be mismanaged (used for
efficiently.
c. After the plug is changed from cash to dividends, the new financial statement
forecasts for Walmart are presented next in Exhibits 10.D–10.F. The benefits from