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Financial Modeling E-Book Part 2 of 4

Financial Modeling E-book


Part 2 of 4

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Depreciation Schedule Overview Financial Modeling E-Book Part 2 of 4


Depreciation Schedule

Create the required line items


Reference net sales as the driver Enter past capital expenditures Project capital expenditures estimated over the forecast period Reference past PP & E balances Depreciation Expense
Forecasted depreciation from existing PP & E Forecasted depreciation from new Capex Calculate the Total Depreciation Expense

Complete Net PP & E table Calculate relevant ratios Consider the Capex and PP & E and make adjustments (smoothen the curve!) as required Link up the following in the model:
Depreciation Expense to Income Statement Depreciation and Capex to Cash Flow Statement Net PP & E to Balance Sheet

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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculations

Input Past Capex

Reference from Income Statement

Set up the Depreciation Schedule


Set up the line items Reference Net Sales Input past capital expenditures Arrive at Capex as a % of Net Sales

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Depreciation Schedule - Sample


Forecast

Financial Modeling E-Book Part 2 of 4

Input, based on research, management guidance

Common driver if projected Capex is not available

Forecasted Capital Expenditures


Sources: research, management projections, MD & A Capex as % of Sales in case no management guidance is available Use your judgment based on industry knowledge and other reasonable drivers

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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Need to be reconciled with a plug Referenced from Balance Sheet

Reference past information


Typically difficult to reconcile past PP & E data Past asset sales may be a balancing item (plug) Include past information that would be useful for estimating and analysis

Referenced from Income Statement

Calculations

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Depreciation Schedule trend analysis Financial Modeling E-Book Part 2 of 4


Projecting Depreciation from Existing PP & E
What is the expected trend of depreciation from existing PP & E

Depreciation from Existing PP&E

Time

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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Forecasts

Using past data to forecast depreciation


Be careful to eliminate land from the existing PP & E to arrive at the depreciable PP & E Estimate remaining useful life, a) divide last years accumulated depreciation by last years depreciation expense (b) divide depreciable PP & E by last years depreciation expense To forecast estimated depreciation from existing assets, use any of the accelerated depreciation methods to account for the varying useful lives of assets Please note that the estimate is subject to change

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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Mid Year Capex convention

Forecasts

References

Drivers

Depreciation on forecasted Capex


Reference forecasted Capex into the depreciation table Assume a useful life for the assets based on existing policies The straight line method with Capex assumed at mid-year is a common practice Please note that the estimate is subject to change
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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculations

Calculate Total Depreciation Expense for the forecasted period

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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Assumption

References & Calculations

Calculations

Fill in the PP & E table and calculate ratios for the forecast period
Do not assume asset sales unless supported by management discussion
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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Adjust to smooth forecasted depreciation

Make adjustments to smoothen the trend over the forecast period

Depreciation in the first forecast period should be l ess than the last historical year as assets finish depreciating
Simple assumption would be to straight line existing PP & E
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Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Adjust to smoothen forecasted depreciation

Make adjustments to smoothen the trend over the forecast period


Adjust useful life as required to smooth forecast depreciation transition

Depreciation as % of PP & E and as % of Capex can be useful ratios


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Depreciation Schedule Link to Income Statement Financial Modeling E-Book Part 2 of 4

Referenced from Depreciation Schedule

Link forecasted depreciation expense to Income Statement

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Depreciation Schedule Link to Balance Sheet Financial Modeling E-Book Part 2 of 4

Referenced from Depreciation Schedule

Link forecasted PP & E to Balance Sheet

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Depreciation Schedule Link to Cash Flow Statement Financial Modeling E-Book Part 2 of 4

Referenced from Depreciation Schedule

Link forecasted depreciation expense Link forecasted Capex

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Illustrative Flow of Funds Financial Modeling E-Book Part 2 of 4


Working Capital & Depreciation Schedules

Depreciation Sales

COGS

Income Statement

Working Capital

Change in WC Working Capital

Cash Flow Statement

PP & E, Depreciation Balance Sheet

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Amortization Schedule Overview Financial Modeling E-Book Part 2 of 4


Amortization creating the schedule
Create the lines items Reference net sales as a driver Fill in details of past additions to intangibles Forecast estimated additions to intangibles Reference past intangibles balances Amortization expense:
Forecast amortization from existing intangibles Forecast amortization from additions to intangibles Calculate total amortization expense

Complete the amortization table and calculate the required ratios

Link up the following:


Amortization to Income Statement Amortization and additions to intangibles to Cash Flow Statement Intangibles to Balance Sheet

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Input Additions

Calculations

Referenced from Income Statement

Setting up the Amortization Schedule

Create the amortization line items


Reference to Net Sales Historical data on additions to intangibles Check footnotes for details of intangibles

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Simplified assumption of constant amount

Forecast additions to intangibles


Check if the company is purchasing new intangibles

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Will need a plug to reconcile

Referenced from BS

Link up past information


Typically past data does not reconcile Consider historical data on additions to intangible as a plug Include past information that may be useful for forecasting/ analysis

Referenced from Income Statement

Calculations

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Forecasts

Forecasting amortization from existing intangibles


Consider sum-of-the years or any accelerated method Estimate the remaining useful lives of existing intangibles Consider straight line method to keep amortization account constant

Estimate

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Convention of Mid Year Additions

Forecasts Reference Drivers

Forecasting amortization from estimated additions to intangibles


Reference forecasted additions to intangibles into the table Make reasonable assumptions on useful life (read through accounting policies and get a feel of industry norms) Straight line method with additions assumed at mid year is popular
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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculations

Arrive at total amortization expense for the forecast period

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Amortization Schedule - Sample Financial Modeling E-Book Part 2 of 4

References and calculations

Assumption

Calculations

Complete the amortization table and calculate the ratios for the forecast period Do not assume sale of intangibles unless backed by management discussion
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Income Statement - Sample Financial Modeling E-Book Part 2 of 4

Referenced from Amortization Schedule

Link up forecasted amortization expense to Income Statement

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Balance Sheet Sample Financial Modeling E-Book Part 2 of 4

Referenced from Amortization Schedule

Keep Constant

Link up forecasted net intangibles

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Cash Flow Statement - Sample Financial Modeling E-Book Part 2 of 4

Referenced from Amortization Schedule

Link up forecasted amortization expense Link up forecasted additions to intangibles

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Illustrative Flow of Funds Financial Modeling E-Book Part 2 of 4


Working Capital, Depreciation & Amortization Schedules

Depreciation Sales

COGS

Income Statement

Working Capital
Amortization

Change in WC Working Capital

Cash Flow Statement

Amortization

PP & E, Depreciation

Balance Sheet

Intangibles, Amortization

Intangibles

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Other Long Term Items Overview Financial Modeling E-Book Part 2 of 4


Use the schedule to include all remaining balance sheet items
Items with no specific drivers Create the required line items Reference historical balances Forecast balances (keep constant if no specific drivers in order to have neutral impact on cash flows) Calculate Cash Flows Link up with Balance Sheet and Cash Flow Statement

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Other Long Term Items Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculations

Referenced from BS

Calculations

Create the Other Long Term Items Schedule

Include all long-term items without specific drivers


Reference past balances from Balance Sheet Calculate the past changes

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Other Long Term Items Schedule - Sample Financial Modeling E-Book Part 2 of 4

Reference to last year, assuming constant value

Forecast future balances


Keep the Long Term items constant for projected years in case of no visible drivers First forecasted year should be referenced to past balances (mark in blue) in order to keep the amount constant

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Other Long Term Items Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculations

Changes from other long term assets and liabilities


Calculation should total to Zero if the items are held constant

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Balance Sheet - Sample Financial Modeling E-Book Part 2 of 4

Referenced from Other LT items Schedule

Link the forecasted long term items to the Balance Sheet

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Cash Flow Statement - Sample Financial Modeling E-Book Part 2 of 4

Referenced from Other LT items Schedule

Link the forecasted change in long term items to Cash Flow Statement

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Illustrative Flow of Funds Financial Modeling E-Book Part 2 of 4


Working Capital, Depreciation, Amortization and Other LT Items Schedules

Depreciation Sales

COGS

Income Statement

Working Capital
Amortization

Change in WC

Working Capital

Cash Flow Statement PP & E, Depreciation

Amortization

Balance Sheet

Other Long Term Items

Intangibles, Amortization

Intangibles

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Financial Modeling E-Book Part 2 of 4

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