Running head: FORECASTED BUDGET INCOME STATEMENT
Analysis of 2013 Forecasted Budget Income Statement for XYZ Company
R. Scott Felter
Bellevue University
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FORECASTED BUDGET INCOME STATEMENT
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Abstract
XYZ Company executives have provided forecasted value estimations for creating the
2013 budgeted income statement; this includes total operating revenues, Cost of Goods
Sold (COGS), asset depreciation, sale of fixed assets, deferred taxes, and dividends
paid out to stockholders. The 2012 income statement supports a well-managed
enterprise with positive net earnings affording dividend payouts to its stockholders. After
preparation of the forecasted year ending budget for 2013, several key numerical
figures would suggest loss of profitability. However, a deeper analytical review of the
forecasted budget suggest potentials the Chief Executive Officer (CEO) has
transparently flowed to his supporting staff and board members. The following analysis
will submit a forecasted budgeted income statement for year ending 2013 with vetted
justifications for the fluctuations in the budget.
Keywords: asset depreciation, cost of goods sold, deferred taxes, dividends,
forecasting, net income-earnings after tax, retained earnings, sale of fixed assets.
FORECASTED BUDGET INCOME STATEMENT
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Analysis of 2013 Forecasted Budget Income Statement for XYZ Company
XYZ Company executives have supplied forecasted estimations for key values
on the income statement to create a forecasted budget year ending 2013. The Vice
President (VP) of Sales has forecasted an increase in total operating revenue of .5%.
Furthermore, the VP of Purchasing has forecasted an increase with COGS concerning
raw goods cost increasing by 3.75%. Asset depreciation will decrease by 10%, deferred
taxes will decrease by 15%, and dividends paid out to common stockholders will
decrease by 10%. Lastly, the Chief Financial Officer (CFO) has stated no revenue from
the sale of fixed assets will occur in 2013.
Analysis of the Forecasted Income Statement Budget
Analysis of the forecasted year end budget for 2013 will answer key elemental
changes in the Gross Profits (GP) revenues, Net Operating Income (NOI), Net IncomeEarnings after Tax (EAT), Earnings per Share (EPS), and Retained Earnings (RE)
offering vetted justifications for the fluctuations in the budget. Please refer to the
attached Excel spreadsheet for the forecasted budgeted income statement.
Gross Profits
The VP of Sales forecasted a 2013 increase in total operating revenue of .5%.
Based on this assumption, this represents a total revenue increase in 2013 of
$12,800.00 USD for a total forecasted total operating revenue of $2,587,800.00 USD.
However, the VP of Purchasing has forecasted an increase in COGS. The cost of raw
materials is reported to increase by 3.75% in 2013; it does not affect any other elements
tracked in the COGS. As raw materials represent 40% of the COGS value, the realized
increase in 2013 is $17,200.00 USD thus increasing the COGS in 2013 to
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$1,167,200.00 USD. The relationship of the total operating revenues minus the COGS
has the forecasted GP decreasing in 2013 to $1,420,600.00 USD.
Even though the forecasted total operating revenues has increased
conservatively for 2013, the increased cost of raw materials has surpassed and reduced
GP by ($4,400.00) USD since the reported GP in 2012. The VP of Sales will need to be
more aggressive than a .5% forecasted increase of sales to offset the COGS increase
of 3.75%. This suggests that the VP of Sales has applied Enterprise Risk Management
(ERM) analysis strategies focusing on trends of customers, market position, and/or
environment to forecast a very conservative sales increase (Jensen, n.d.).
Net Operating Income
Forecasted asset depreciation will be decreasing by 10%, as maturation of a
purchased asset has been realized (Accounting Coach, n.d.). The forecasted
depreciation liability for 2013 is $90,000.00 USD a reduction of ($10,000.00) USD from
2012. Due to this maturation of the liability, the NOI has a forecasted increased revenue
of $5,600.00 USD for 2013.
Net Income-Earnings after Tax
The CFO has forecasted 2013 sale of fixed assets to be $0.00 USD, accordingly
no taxes paid on the sales; in addition, deferred taxes liability will decrease by 15%
realizing a reduction of advanced paid taxes in 2013 of $18,600.00 USD (Accounting
Tools, n.d.) (Investopedia, 2003). This combination of values will reduce the total taxes
paid by XYZ Company in 2013 to $265,400.00 USD (Merritt, n.d.). Due to these
indicators, the forecasted Net Income-EAT increases by $4,200.00 USD for a total of
$430,200.00 USD.
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Earnings per Share
The forecasted EPS for 2013 will increase due synergetic relationship with the
increased Net Income-EAT; the Net Income-EAT increased due to an improved tax
status forecasted in 2013 over 2012. The 2013 realized increase for the EPS is $40.00
USD per share for the common stockholders for a total of $3,350.00 USD per share.
Retained Earnings
The forecasted RE for 2013 has increased nearly to 7% for a value of $15,300.00
USD for a total RE of $235,300.00 USD. The increase in RE has a direct relationship to
the 10% reduction of forecasted dividend paid out of $99,900.00 USD to common
stockholders. This represents a decrease payout of $11,100.00 USD in 2013 over the
2012 payout of $111,000.00 USD.
XYZ Company CEO, his support officers, and the board have conceivably
applied ERM analysis syncing the increased RE to purchase new equipment, expand
facilities and/or broaden their enterprise diversification by purchasing a new business
(Bragg, 2010). Due to the fact that the 2013 forecasted budgeted income statement
depicts a maturation of an asset in the NOI with no sales of fixed assets, would be a
good indicator that replacing aged equipment is anticipated (Investopedia, 2003). The
increased RE will fund the cost thus decreasing the need for debt financing.
External Factors for Forecasting
Forecasting is an intricate part of an effective ERM strategy. Although an
enterprise will use current information to produce a forecast, it is still at best an
estimation and not indicative of an absolute outcome for the enterprise. Therefore, it is
suggested that a rolling forecast be applied, so that internal and/or external
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developments can be applied creating a modified assessment of the “state of the
enterprise” for all stakeholders instilling transparency and enhanced forecasting (Kiisel,
2015).
External factors that can affect forecasted budgets or any forecasting perspective
with concern to the enterprise are state of the economy or industry, competition,
technology advancements, and customers’ needs or trends within your industry
(Jensen, n.d.).
State of Economy or Industry
This one external factor is number one on any responsible forecaster’s list. A
close review of predications for your industry coupled with historical data retrieved from
you ERP, will guide a solid evaluation of forecasted sales. In addition, the economy has
direct effect on sales and a close review will need to be applied to correctly anticipate
sales revenues.
Competition
An enterprise’s direct competitors has an influence on sales and/or perception of
your existing customers. If your competitors are offering comparable quality products at
less cost or aggressive marketing schemes, then this could be an indicator of lost sales
revenue affecting the forecasting position.
Technology Advancements
As was stated earlier in the XYZ analysis of the RE, XYZ was forecasted as
retooling or replacement of equipment, thus reinvesting in new production technologies
providing increased capabilities on all fronts. It is important to note and accumulate this
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information from operations; this will ensure no last minute scramble to finance
upgrades and inadvertently handing the advantage to you direct competitors.
Customer Needs or Trends
This is the primary responsibility of the Sales and Marketing Team to stay
apprised of customers’ needs. The Team should be utilizing big data accumulated in the
ERP, so historical data points can be applied forecasting a baseline, but also in
conjunction with trending information that can be applied to adjust the forecast.
Conclusion
Analysis of the forecasted year end budget 2013 for XYZ Company has
presented key elemental changes in the GP revenues, Net Operating Income (NOI), Net
Income-Earnings after Tax (EAT), Earnings per Share (EPS), and Retained Earnings
(RE); furthermore, a vetted explanation has been supplied for each justifying the
fluctuations in the budget. Indicators have suggested that XYZ Company CEO, his
support officers, and the board have conceivably applied ERM analysis syncing the
forecasted 2013 budgeted income statement to enterprise goals. Furthermore, XYZ
Company appears to be aware of internal/external factors and are managing a
conservative ERM strategy to increase production, increase long term profitability,
reinvestment into a viable enterprise, and goals orientated to sustain continuous growth.
As a shareholder, this should be viewed as a healthy indicator that the enterprise is
stable and a good investment.
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References
Accounting Coach. (n.d.). What is depreciation expense? | AccountingCoach. Retrieved
September 12, 2015, from http://www.accountingcoach.com/blog/what-isdepreciation-expense
Accounting Tools. (n.d.). Fixed Asset Definition - AccountingTools. Retrieved September
12, 2015, from http://www.accountingtools.com/definition-fixed-asset
Bragg, S. (2010, December 30). What are retained earnings? - Questions & Answers AccountingTools. Retrieved September 12, 2015, from http://www.accounting
tools.com/questions-and-answers/what-are-retained-earnings.html
Investopedia. (2003, November 25). Deferred Income Tax Definition | Investopedia.
Retrieved September 12, 2015, fromhttp://www.investopedia.com/terms
/d/deferredincometax.asp
Investopedia. (2003, November 25). Retained Earnings Definition | Investopedia.
Retrieved September 12, 2015, from http://www.investopedia.com
/terms/r/retainedearnings.asp
Jensen, K. (n.d.). Factors Considered in Financial Forecasting. Retrieved September
12, 2015, from http://smallbusiness.chron.com/factors-considered-financialforecasting-80716.html
Kiisel, T. (2015, August 28). Budgeting and Forecasting - What's the Difference?
OnDeck. Retrieved September 12, 2015, from https://www.ondeck.com
/blog/budgeting-forecasting-whats-difference/
FORECASTED BUDGET INCOME STATEMENT
References
Merritt, C. (n.d.). Tax Payable vs. Deferred Income Tax Liability. Retrieved September
12, 2015, from http://smallbusiness.chron.com/tax-payable-vs-deferred-incometax-liability-48704.html
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