Exam 10: Forecasting Financial Statements

Techtronics is a leader in manufacturing computer chips,which is very capital-intensive.Because the production processes in computer chip manufacturing require sophisticated and rapidly changing technology,production and manufacturing assets in the chip industry tend to have relatively short useful lives. The following summary information relates to Techtronics' property,plant,and equipment for 2009 and 2010: Required Assume that Techtronics depreciates all property,plant,and equipment using the straight-line depreciation method and zero salvage value.Assume that Intel spends $6,000 on new depreciable assets in Year 1 and does not sell or retire any property,plant,and equipment during Year 1. a.Compute the average useful life that Techtronics used for depreciation in 2010. b.Project total depreciation expense for Year 1 using the following steps: (i)project depreciation expense for Year 1 on existing property,plant,and equipment at the end of 2010; (ii)project depreciation expense on capital expenditures in Year 1 assuming that Intel takes a full year of depreciation in the first year of service; and (iii)sum the results of (i)and (ii)to obtain total depreciation expense for Year 1. c.Project the Year 1 ending balance in property,plant,and equipment,both at cost and net of accumulated depreciation.

A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.

In comparison of 2010 to 2009 performance,Watson Company's inventory turnover decreased substantially,although sales and inventory amounts were essentially unchanged. Required: During a corporate meeting you heard the following managers postulate why the decreased inventory turnover ratio happened.Which statement best explains the decreased inventory turnover ratio and why? a.The marketing manager said: The decreased inventory turnover ratio is due to an increase in the cost of goods sold. b.The operations manager said: The decreased inventory turnover ratio is due to increased gross profit percentage. c.The credit manager said: The decreased inventory turnover ratio is due to a decrease in the accounts receivable turnover. d.The shipping manager said: The decreased inventory turnover ratio is due to decreased total asset turnover.

When projecting ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.

The following information about Douglas Corp.'s Accounts Receivable and Sales are presented below: Required: a.Using this information,forecast Douglas Corp.'s the growth in Accounts Receivable for years 2013-2017. b.What problem does a constant A/R turnover assumption cause? c.Provide a solution to the problem caused by a constant A/R turnover assumption.

Financial statement forecasts are important analysis tools because forecasts of ______________________________ play a central role in valuation and many other financial decision contexts.

Card Sharks,Inc. Card Sharks,Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 33% and in 2013 of 40%. Given the information provided about Card Sharks,what is the company's 2012 projected year-end cash balance?

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following companies would most likely not be able to increase prices in the near future?

Financial statement forecasts should rely on _________________________ across financial statements.

The following balance sheet and income statement pertain to Goode Corp.,using the following assumptions complete a forecasted 2013 income statement:

Analysts must develop realistic expectations for the outcomes of future business activities. To develop these expectations,analysts build a set of _____________________________.

As a firm progresses through the introduction life-cycle stage,what type of flexible account will it be more likely to use to balance the balance sheet?

To ensure that the financial statements articulate,it is important that the change in the cash balance on the balance sheet each year agrees with

One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances.What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?

Glad Rags,Inc.sells women's clothes.Provided below is selected financial statement information: Required: a.Compute the inventory turnover ratio for 2010. b.Clothes,Inc.projects that sales will grow at a compound rate of 7% per year for years 2011-2013 and that the cost of goods sold to sales percentage will equal that realized in 2010.Compute the projected implied level of inventory at the end of 2011 to 2013.

Sparky's Sparky's sells auto parts.Provided below is selected financial information from the company's 2012 annual report: Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012.If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?

As an analyst it is important when projecting sales to make estimates about future changes in sales volume.Compare how you might make estimates about future sales value for a company in a mature industry and one in a rapidly growing industry.

If a company has very low operating leverage (i.e.a low proportion of fixed costs in the cost structure)and no changes are expected in operations

Many times an analyst will compute ending accounts receivable or inventory balances using turnover ratios.Discuss the advantage and disadvantage of using this methodology.