Exam 10: Forecasting Financial Statements

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$\text { (Assume Amounts in Thousands). }$
$\text { a. Benson inventory turnover: } \$ 3,541 /[.5(\$ 1,358+\$ 1,203)]=2.77$

b.
$\begin{array}{lllllllll}&\text { Cost of}&&&&\text { Inventories}&\text { Percentage}\\&\text { Goods } & \text { Inventory } & \text { Average } & \text { Beginning } & \text { End of } & \text { Change in } \\&\text { Sold } & \text { Turnover } & \text { Inventories } & \text { of Year } & \text { Year } & \text { Inventories }\\\text { Year }+1 & \$ 3,952 & 2.77 & \$ 1,427 & \$ 1,203 & \$ 1,655 & +37.6 \% \\\text { Year }+2 & \$ 4,410 & 2.77 & \$ 1,595 & \$ 1,655 & \$ 1,535 & -7.3 \% \\\text { Year }+3 & \$ 4,922 & 2.77 & \$ 1,780 & \$ 1,535 & \$ 2,025 & +32.0 \% \\\text { Year }+4 & \$ 5,493 & 2.77 & \$ 1,986 & \$ 2,025 & \$ 1,947&-3.8 \% \\\text { Year }+5 & \$ 6,130 & 2.77 & \$ 2,217 & \$ 1,947 & \$ 2,486 & +27.6 \%\end{array}$
These projections exhibit substantial volatility in ending inventory, which is unrealistic considering the assumptions of smooth growth in sales and costs of sales.

c. The above projections indicate an increase in inventories from $\$ 1,203$ to $\$ 2,486$ over five years, representing a compound annual rate of growth of $15.62$ percent [= $\left.(\$ 2,486 / \$ 1,203)^{\wedge}(1 / 5)-1\right] .$

$\begin{array}{ll}&\text { Ending Inventories }\\\text { Year }+1 & \$ 1,203 \times 1.1562=\$ 1,391 \\\text { Year }+2 & \$ 1,391 \times 1.1562=\$ 1,608 \\\text { Year }+3 & \$ 1,608 \times 1.1562=\$ 1,859 \\\text { Year }+4 & \$ 1,859 \times 1.1562=\$ 2,150\end{array}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Year $+5$ $\quad\quad\quad\$ 2,150 \times 1.1562=\$ 2,486$
These smoothed inventory forecasts more closely match the assumptions of smooth growth in sales and costs of goods sold.
d. Benson inventories actually decreased from $\$ 1,358$ at the end of 2009 to $\$ 1,203$ at the end of 2010 , a decline of $11.4$ percent. Using this growth rate leads to the following projections of inventories and implied turnover rates:
$\begin{array}{rrrll}&\text { Ending Inventories }&\text { Implied Turnover }\\\text { Year }+1 & \$ 1,203 \times 0.886= \$ 1,066 & \$ 3,952 /[(\$ 1,203+\$ 1,066) / 2] & =3.48 \\\text { Year }+2 & \$ 1,066 \times 0.886= \$ 944 & \$ 4,410 /[(\$ 1,066+\$ 944) / 2] & =4.39 \\\text { Year }+3 & \$ 944 \times 0.886= \$ 836 & \$ 4,922 /[(\$ 944+\$ 836) / 2] & =5.53 \\\text { Year }+4 & \$ 836 \times 0.886= \$ 741 & \$ 5,493 /[(\$ 836+\$ 741) / 2] & =6.97 \\\text { Year }+5 & \$ 741 \times 0.886= \$ 656 & \$ 6,130 /[(\$ 741+\$ 656) / 2] & =8.77\end{array}$

This problem demonstrates that simply assuming that past growth rates will persist can lead to unreasonable forecasts. In this case, it is highly unlikely that Benson can continue to decrease inventory while at the same time generating an increase in sales. It would be very unusual for a retail bookstore such as Benson to be able to achieve $8.77$ inventory turns a year by Year $+5$

Correct Answer:

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$\begin{array}{lcrr}&\text { Annual } & \text { Average } & \text { Days Sales } & \text { Year-end } \\&\text { Sales } & \text { Sales/Day } & \text { in Cash } & \text { Cash Bal } \\\hline2010&\$ 125,980,673 & \text { Sales/365 } & \text { Given } & \text { Sales/Day *14 } \\2011&\$ 139,838,547 & 383,119 & 14 & \$ 5,363,670 \\2012&\$ 160.814 .329 & 440.587 & 14 & \$ 6.168,221\end{array}$