Forecasting: Methods and Applications
Guiding an organisation in tough economic times requires vision and thoughtful analysis. This publication defines issues that must be fully considered in the forecasting process and provides insight into how forecasting impacts the income statement, capital structure, and balance sheet. Forecasting: Methods and Applications contains essential forecasting tools and addresses short and long term challenges and critical factors. It is written in a concise and clear manner that allows immediate use of its content.
Readers will be able to understand and apply the central tenets of planning and forecasting, utilise a base forecasting model and determine maximum sustainable growth. This publication is an essential resource for management accountants involved in the planning and budgeting functions.
About the Author:
Wallace N.”Dave” Davidson, III, Ph.D., CMA, is a professor at Southern Illinois University Carbondale and a dynamic instructor with 25 years’ experience in corporate finance. He previously served as a financial analyst in the utility industry. Dr. Davidson is an accomplished author of several continuing education seminars for the AICPA, including the popular "Financial Statement Analysis: Basis for Management Advice." Twice recognized as an AICPA Outstanding Discussion Leader, Dr. Davidson speaks nationally to business organizations and state societies.
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Table of Contents
The Balance Sheet - Per Cent of Sales Method
When using the per cent of sales method to develop the first-pass forecast, you assume that the spon-taneous assets and liabilities will remain in roughly the same proportion to sales as historically. The EFN will be the balancing figure that allows the balance sheet to balance.
Assets = Liabilities + Equity
To compute the first-pass balance sheet, you increase each spontaneous account in the same pro-portion as the sales increase. For example, if sales are expected to increase by 25%, then the cash account of the projected balance sheet will be increased by 25% over the historical cash figure. The other spontaneous accounts are treated in a similar manner.
You then add fixed asset increase, net of depreciation, as a lump sum to the historical fixed asset account. This addition provides you with the expected balance in fixed assets at the end of the next year. The addition to retained earnings will be computed (from the last term of the EFN equation) and added to the historical retained earnings balance to obtain the forecasted amount. All miscel-laneous changes must be accounted for in the balance sheet.
At this point, your assets will not be the same sum as liabilities and equity. The EFN is what will balance the balance sheet.
Once the balance sheet is prepared, then various methods of financing the EFN can be examined. This allows the corporate planner to assure the presence of adequate funds and the type of funds that optimise the company’s capital structure.
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