Business Administration 1220E Chapter Notes -Retained Earnings, Sensitivity Analysis

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Nicole Wallenburg
Business 1220
Business 1220 Textbook Notes #4
Projected Financial Statements
There are three basic reasons for preparing projected statements:
1. To forecast financial performance or position (e.g., What will earnings likely be
next year?)
2. To examine the interrelationship of financial policies with changes in marketing
and production policies (e.g., If sales double, how much more money will be
required in inventory investment?)
3. To forecast cash needs, debt needs, capacity to expand operations and others (e.g.,
How large will the bank loan have to be six months from now?)
A projected statement is only as good as the estimates, assumptions, and judgement that
went into its preparation. Three sources of information can be used to prepare projected
1. Managers’ estimates (e.g., a sales forecast)
2. Past financial relationships (e.g., financial ratios of the previous year)
3. Assumptions as to what might occur
Projected Statement of Earnings
Always begin a set of projected statements with the statement of earnings, followed by
the statement of retained earnings, and then the balance sheet.
1. Estimating a new sales volume is the first and most important step. Use managers’
estimates and/or past growth trends as guidelines
2. Use the profitability ratio analysis to estimate cost of goods sold, gross profit, and
operating expenses. Modify these estimates for new information or for a
developing trend
3. Choose the extent of detail in the operating expenses section according to the
quality of the information available and the objectives of preparing the projected
statement of earnings. When projected operating expenses, think about how each
expense behaves.
4. Prepare more than one projected statement of earnings when appropriate
Projected Balance Sheet
1. Begin by deciding what the balancing figure is going to be (usually cash or bank
loan payable)
2. Fill in all the accounts that will probably remain the same
3. Fill in the accounts already calculated
4. Calculate the remaining accounts. Usually, a good way to begin is by using
averages or trends of previous years’ ratios and the adjusting these as needed
5. Calculate the balancing figure the number that makes the balance sheet balance
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