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Forecasting Financial Statements > Forecasting the Income Statement
Forecasting the Income Statement
• Sales Forecast Input
• Inputs to the Production Schedule
• Inputs to COGS
• Other Expenses
• Pro Forma Income Statement
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Forecasting Financial Statements > Forecasting the Income Statement
Sales Forecast Input
• Net sales are operating revenues earned by a company for selling its products or
rendering its services.
• Gross sales are the sum of all sales during a time period. Net sales are gross
sales minus sales returns, sales allowances, and sales discounts.
• The purpose of profit-based sales target metrics is to ensure that marketing and
sales objectives mesh with profit targets.
Sales
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Forecasting Financial Statements > Forecasting the Income Statement
Inputs to the Production Schedule
• A good purchased as a "raw material" goes into the manufacture of a product.
• A good only partially completed during the manufacturing process is called "work
in process".
• When the good is completed as to manufacturing but not yet sold or distributed to
the end-user, it is called a "finished good".
• Inventory management is primarily about specifying the shape and percentage of
stocked goods.
• Basic reasons for keeping an inventory involve time, uncertainty and economics
of scales.
Production budget
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Forecasting Financial Statements > Forecasting the Income Statement
Inputs to COGS
• Costs include all costs of purchase, costs of conversion, and other costs incurred
in bringing the inventories to their present location and condition.
• The key components of cost generally include: parts - raw materials and supplies
used, labor - including associated costs such as payroll taxes and benefits, and
overhead of the business allocable to production.
• A miscalculation or faulty estimation can be amplified drastically, causing a vastly
different forecasted amount of income than what will actually come to pass.
A Sample Income Statement
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Forecasting Financial Statements > Forecasting the Income Statement
Other Expenses
• Other expenses include operation expenses section and non-operation expenses
section.
• Operation section expenses include SG&A, depreciation, amortization, and R&D
expenses.
• Non-operation section expenses include finance costs, income tax expense, and
discontinued operations expenses.
• SG&A is usually understood as a major portion of non-production related costs, in
contrast to production costs such as direct labour.
Expenses
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Forecasting Financial Statements > Forecasting the Income Statement
Pro Forma Income Statement
• The pro forma accounting is a statement of the company's financial activities
while excluding "unusual and nonrecurring transactions" when stating how much
money the company actually made.
• Income statement is a company's financial statement that indicates how the
revenue is transformed into the net income during a certain period of time.
• Pro forma Income statement includes revenue, COGS, operational expenses and
non-operational expenses.
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Appendix
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Forecasting Financial Statements
Key terms
• ABC analysis The ABC analysis is a business term used to define an inventory categorization technique often used in materials
management. It is also known as Selective Inventory Control. Policies based on ABC analysis: A ITEMS, very tight control and
accurate records; B ITEMS, less tightly controlled, and good records; and C ITEMS, simplest controls possible and minimal
records.
• allocate To distribute according to a plan.
• contribution margin In cost-volume-profit analysis, a form of management accounting, contribution margin is the marginal profit
per unit sale.
• deferred tax liabilities Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense, or
income is accrued but not taxed until received.
• depreciation The measurement of the decline in value of assets. Not to be confused with impairment, which is the
measurement of the unplanned, extraordinary decline in value of assets.
• fixed costs In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced
by the business.
• intangible assets Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically
measured, and are created through time and effort, and are identifiable as a separate asset.
• overhead Any cost or expenditure (monetary, time, effort or otherwise) incurred in a project or activity, which does not directly
contribute to the progress or outcome of the project or activity.
• pro forma For the sake of form only.
• write-off The term written-off describes a reduction in recognized value. In accounting terminology, it refers to recognition of the
reduced or zero value of an asset.
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Forecasting Financial Statements
A Sample Income Statement
Expenses are listed on a company's income statement.
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Forecasting Financial Statements
Production budget
Production budget is important for inventory and sales revenue
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Forecasting Financial Statements
Production schedule
Production schedule plays an important role in financial forecasting.
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Forecasting Financial Statements
Sales
Increasing sales revenue is one of the goals of businesses.
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Forecasting Financial Statements
Expenses
Operational expenses and non-operational expenses are the main cash outflow of a business.
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Forecasting Financial Statements
A company wants to have $5 million in sales with $1 million in
profit. It will have fixed costs of $3 million. Each unit of its product
sells for $20. How much contribution per unit must the company
have to meet its goals?
A) $16
B) $0.79
C) $1.60
D) $8
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Forecasting Financial Statements
A company wants to have $5 million in sales with $1 million in
profit. It will have fixed costs of $3 million. Each unit of its product
sells for $20. How much contribution per unit must the company
have to meet its goals?
A) $16
B) $0.79
C) $1.60
D) $8
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Forecasting Financial Statements
Which of the following appropriately defines a type of production
schedule input?
A) Work in process are materials and components that have begun
transformation to finished goods.
B) All of these answers.
C) Goods for resale are returned products that can still be sold.
D) Raw materials are basic materials that are used to make a company's
products.
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Forecasting Financial Statements
Which of the following appropriately defines a type of production
schedule input?
A) Work in process are materials and components that have begun
transformation to finished goods.
B) All of these answers.
C) Goods for resale are returned products that can still be sold.
D) Raw materials are basic materials that are used to make a company's
products.
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Forecasting Financial Statements
Which of the following statements correctly defines a component
of Cost of Goods Sold?
A) Labor costs are the wages paid to employees who spend their time
working directly on the product.
B) Parts, Raw Materials, and supplies used are all physical objects that
go into making a good.
C) All overhead costs are associated with production activities.
D) All of these answers.
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Forecasting Financial Statements
Which of the following statements correctly defines a component
of Cost of Goods Sold?
A) Labor costs are the wages paid to employees who spend their time
working directly on the product.
B) Parts, Raw Materials, and supplies used are all physical objects that
go into making a good.
C) All overhead costs are associated with production activities.
D) All of these answers.
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Forecasting Financial Statements
Which of the following statements correctly defines a type of other
expenses input?
A) Selling, General, and Administrative expenses consist of the combined
payroll costs.
B) All of these answers.
C) Depreciation is the decrease in the value of an asset due to its use
over time.
D) Amortization is the process of depreciating an intangible asset of the
company.
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Forecasting Financial Statements
Which of the following statements correctly defines a type of other
expenses input?
A) Selling, General, and Administrative expenses consist of the combined
payroll costs.
B) All of these answers.
C) Depreciation is the decrease in the value of an asset due to its use
over time.
D) Amortization is the process of depreciating an intangible asset of the
company.
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Forecasting Financial Statements
A company is considering merging with another business. It is
planning on preparing a pro forma income statement. Which of
the following should be included in the pro forma statement?
A) How much the company's revenues will increase due to the merger.
B) If the merged company will have increased Research & Development
(R&D) expenses.
C) All of these answers.
D) How much the merged company's income tax expense will increase.
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Forecasting Financial Statements
A company is considering merging with another business. It is
planning on preparing a pro forma income statement. Which of
the following should be included in the pro forma statement?
A) How much the company's revenues will increase due to the merger.
B) If the merged company will have increased Research & Development
(R&D) expenses.
C) All of these answers.
D) How much the merged company's income tax expense will increase.
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Forecasting Financial Statements
Attribution
• Wikipedia. "Profit-based sales targets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profit-based_sales_targets
• Wikipedia. "Sales (accounting)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sales_(accounting)
• Wiktionary. "fixed costs." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fixed+costs
• Wikipedia. "contribution margin." CC BY-SA 3.0 http://en.wikipedia.org/wiki/contribution%20margin
• Wikipedia. "Raw materials." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Raw_materials
• Wikipedia. "Inventory." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inventory
• Wikipedia. "Finished goods." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Finished_goods
• Wikipedia. "Work in process." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Work_in_process
• Wikipedia. "ABC analysis." CC BY-SA 3.0 http://en.wikipedia.org/wiki/ABC%20analysis
• Wikipedia. "Cost of goods sold." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_goods_sold
• Wiktionary. "overhead." CC BY-SA 3.0 http://en.wiktionary.org/wiki/overhead
• Wiktionary. "allocate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/allocate
• Wikipedia. "R&D." CC BY-SA 3.0 http://en.wikipedia.org/wiki/R%2526D
• Wikipedia. "SG&A." CC BY-SA 3.0 http://en.wikipedia.org/wiki/SG%2526A
• Wikipedia. "Income statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_statement
• Wikipedia. "Amortization." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Amortization
• Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Depreciation
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Forecasting Financial Statements
• Wikipedia. "intangible assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/intangible%20assets
• Wikipedia. "deferred tax liabilities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/deferred%20tax%20liabilities
• Wikipedia. "Pro forma." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Pro_forma
• Wikipedia. "Income statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_statement
• Wiktionary. "depreciation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/depreciation
• Wiktionary. "pro forma." CC BY-SA 3.0 http://en.wiktionary.org/wiki/pro+forma
• Wiktionary. "write-off." CC BY-SA 3.0 http://en.wiktionary.org/wiki/write-off
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