2. Projected financial statements is a tool of the company to
set an overall goal of what the company’s performance and
position will be for and as of the end of the year. It sets targets
to control and monitor the activities of the company. Forecast
or calculate the following reports:
Projected Income Statement
Projected Statement of Financial Position
3. Application of the Projected Financial
Statements Approachbe
Step 1. Forecast the Income Statement
a. Establish a sales projection
b. Project the cost of sales
c. Prepare the production schedule and project the corresponding
productioncosts,
d. direct materials, direct labor and overhead for manufacturing
companies)
e. Estimate selling and administrative expenses.
f. Consider financial expenses if any
g. Determine the net profit
4. Step 2. Forecast the Statement of Financial Position.
a. Project the assets needed to support projected sales.
b. Project funds generated (through accounts payable and accruals) and
byretained earnings through profits generated.
c. Project liability and stockholder’s equity accounts that will not rise
spontaneously with sales (e.g., notes payable, long-term bonds,
preferred stock, and ordinary shares) but may change due to financing
decisions madelater.
d. Determine if additional funds needed by using the following formula.
5. Additional Funds Needed (AFN) = Required Increase in Assets -
SpontaneousIncrease in Liabilities - Increase in Retained earnings
The additional financing needed raised by borrowing from the banks as
notes payable, by issuing long-term bonds by selling new ordinary shares or
bysome combination of these actions
6. Step 3. Raising the Additional funds needed.
Step 3. Raising the Additional funds needed.
a. Target capital structure:
b. Effect of short-term borrowing on its current ratio;
c. Conditions in the debt and equity markets; or
d. Restrictions imposed by existing debt agreements.
7. Step 4. Consider financing feedbacks.
Depending on whether additional funds borrowed or has raised through
ordinary shares, consideration has given on additional interest in the income
statement or dividends, thus decreasing the retained earnings.
Illustrative Case: Financial Forecasting (Percent of Sales Method)
8. The Mellinial Company has the following statements
representative of thecompany’s historical average.
Sales P 2,000,000
Cost of Sales (1,200,000)
Gross profit 800,000
Operating expenses 380,000)
Earnings before interest and taxes 420,000
Interest expense 70,000
Earnings before taxes 350,000
Taxes (35%) (122,500)
Net Income/Earnings after taxes P 227,500
Dividends P 136,500
Mellinial Company Income Statement
For the year ended Dec. 31, 2019
12. Supporting computations:
(1) Cash = 2.5% x P 2.4M sales
(2) Accounts receivable = 20% of 2.4M
(3) Inventory = 37.5% x P 2.4 M
(4) No percentages computed for fixed assets, notes payable, long-term debt, ordinary
shares and retained earnings because they are not assumed to maintain a direct
relationship with sales volume. For simplicity, depreciation is not explicitly
considered.
(5) Accounts payable = 12.5% of 2.4M
(6) Accrued expenses = 0.5% of P 2.4M
(7) Accrued taxes = 1% of P 2.4M
(8) Retained earnings = P 300,000 + P 282,100 – P 101,600
13. Formula Method * Additional Financing needed (AFN) may also be computed as
follows:
Additional funds needed = required increase in assets – Spontaneous
increase in liabilities – Increase in retained earnings
Where:
Required increase in assets = Change in Sales x Current Assets (present)
Sales (present)
Spontaneous increase = Change in Sales x Current Liabilities
(present)in liabilities Sales (present)
Increase in retained earnings = Earnings after taxes - Dividend
Applied to Millenial Co., AFN computed as follows:
