Chapter 5

Financial Statements Forecasts

THE FORECASTED INCOME STATEMENT

BACNOTAN CONSOLIDATED INDUSTRIES, INC.

FORECASTED INCOME STATEMENT, 2004

(million pesos)

Actual Forecast Forecasting Method Used

2003 2004

Net Sales P531.6 P538.5 Recent growth rate 1.01298%

Cost of Goods Sold (COGS) 462.2 468.2 Ratio of COGS to sales [86.9451%]

Gross Profit on Sales 69.4 70.3

Operating Expenses (21.9) (22.3) Recent growth rate [1.018265]

Income from Operations 47.5 48.0

Other Income 2.6 2.6 Same as 2003

Interest Expense (16.2) (26.7) Ratio of interest expense to contractual debt

outstanding

Income Before Tax 33.9 23.9

Provision for Tax 11.8 8.4 35% of taxable income

Income After Tax P22.1 P15.5

The sales forecast is the starting point of the forecasted income statement. It is also known as the “pro forma income
statement” or the “profit budget”.

The COGS is estimated using a listing of its major components to determine whether major deviations from past cost
trends can be expected. For example:

when jump in raw materials prices is expected

when a new labor contract rates are to be used

when a depreciation on a new building is to be recognized

If there is no such changes, the ratio of the COGS to sales will be a sufficient basis.

Operating expenses are less susceptible to changes in sales because of the fixed nature of some of the expense items.

From an outside analyst’s perspective, we can assume an “inflation rate” adjustment as represented by the rate of
increase in 2003 over 2002.
 BACNOTAN CONSOLIDATED INDUSTRIES, INC.

FORECASTED BALANCE SHEET, 2004

Assets (in millions) Actual Forecast Forecasting Method Used

2003 2004

Cash and Temporary Investments P41.15 P41.84 Same as 2003 proportion to all expenses

Accounts Receivable 22.96 23.24 Turnover: ratio of sales to receivables

ARTO = 23.17

Inventories and in-Transit Raw Mats. 100.31 101.61 Turnover: ratio of inventory to COGS

Notes, Other Receivables and Prepayments 14.81 14.81 No change over 2003

Investments 7.51 7.51 No change over 2003

Property, Plant & Equipment 976.4 946.44 Reduced by total depreciation for 2004

Deferred Charges and Other Assets 19.88 8.16 Same reduction from 2002 and 2003

TOTAL ASSETS P1,183.02 P1,143.61

Liabilities and Stockholders’ Equity (in

millions)

Accounts payable P 87.03 P88.15 Ratio of A/P to inventory in 2003

Notes Payable 42.52 13.27 Balancing item

Acceptances Payable 1.40 1.40 No change over 2003

Contracts Payable 2.93 2.93 No change over 2003

Current Portion of Long-term debt 14.82 97.35 With increase of $82.53 from 2003

Long-Term Debt and Reserves 727.59 630.23 Net of current portion

Capital Stock 114.24 114.24 No change over 2003

Other Capital Accounts 102.33 95.27 Adjust for depreciation on appraisal

increase

Retained Earnings 90.16 100.77 Adjust for income and dividends

TOTAL LIABILITIES AND STOCKHOLDERS’S P1,183.02 P1,143.61

EQUITY
THE FORECASTED BALANCE SHEET

The A/R forecast should consider the sales for 2004 along with the company’s credit policy and bad debts.

We can base our estimate on the prevailing A/R turnover rate of 23.17 times or about 15 days’ sales tied up in A/R.

With sales forecasted at P538.5 in 2004, the estimated A/R for 2004 comes up to P23.24 million (P538.5 / 23.17)

The inventory forecast should be based on a production schedule given sales and should depend on prevailing inventory
levels, prices, and stock policy.

Estimates should also be made using the inventory turnover ratio as we have done.

Net fixed assets are estimated by determining the amount of additional capital expenditures planned disposition of fixed
assets and depreciation for the next period.

We assumed that only depreciation on cost of fixed assets, worth P22.9 million as in 2003, will affect the net fixed assets
account for Bacnotan.

Accounts payable is estimated to be in the same ratio to inventory as in 2003.

Since this ratio was 86.7% in 2003 and we estimated the inventory for 2004 at P101.61 million, accounts payable is set at
P88.15 million.

Capital stock and other capital accounts can be estimated by determining the planned new stock issues for the next
period net of any retirement of stocks.

In certain companies, revaluation surplus is recognized. For Bacnotan, we reduced the revaluation surplus by the
estimated depreciation on appraisal increase n fixed assets based on the prevailing company practice.

THE CASH FLOW FORECAST

This serves to integrate the pro forma balance sheet and income statement into the sources and uses of cash
perspective.

A monthly cash forecast would need the following:

Monthly A/R collection Capital expenditures and other acquisitions

Payments of A/P Proceeds from new equity issues

Cash purchases of inventory Dividend payments

Loan amortization and other payables Proceeds from sale of fixed assets or investments

Anticipated drawings on existing credit lines

BACNOTAN CONSOLIDATED INDUSTRIES, INC.

CASH FLOW FORECAST (in millions)

2004

Assumptions/Sources of Data

Beginning Cash Balance, June 30, 2003 P41.15 Ending balance for cash and temporary investments as of June
30, 2003

Est. Cash Receipts

Collection of beginning A/R P22.96 All receivables were collected

Collection of current assets 515.26 All sales were collected except ending receivables balance, 2004

Additional borrowings (notes) 4.87 Proceeds from new notes payable

Liquidation of other assets 11.72 Sale of other holdings

Total Estimated Cash Receipts P598.56

Cash disbursements:

Payments for COGS P357.15 All costs were paid in cash except depreciation and ending A/P
balance in 2004

Payment of beginning A/P 87.03

Payment of 2003 Income Tax balance 7.30 All tax outstanding pertains to 2004

payment of current portion of LT debt 14.82 Assumed all paid out

Dividends declared and paid 4.89 Similar to the previous year

Payment of beginning notes payable 35.23 The current classification justifies this treatment

Other cash operating expenses 22.30 Cash expenses other than COGS

Interest Expenses paid out 26.70 Assumed paid out in cash

Additional inventory purchase 1.30 Assumed cash purchase

Total Est. Cash Disbursements P556.72

Ending Cash Balance Forecast, 6/30/04 P41.84 Corresponds to ending balance of cash and temporary
investments as of 6/30/04