Chapter 5

FORECASTING FINANCIAL STATEMENTS

Homework Assignment: THE CORTINO CORPORATION

Forecast the income statement and balance sheet for 20X2 based on the following data for 20X1 and expectations or assumptions for 20X2. Your answer should be formatted similarly to Figures 5-1 and 5-2 on pages 174 and 176 of the Financial Analysis textbook.

Income Statement

Annual sales for 20X1 were $4,500,000. The marketing organization has reviewed its annual sales for the last five years and made a statistical projection of annual sales for 20X2. Following this, the firms planning staff reviewed the growth of worldwide competition and markets, as well as changes in other socioeconomic conditions, and analyzed how they might affect the statistical projections of past trends. As a result of their analyses, they concluded that the firm's annual sales revenues will increase 15% in 20X2 over its value for 20X1. Cortino has no other sources of income.

The cost of goods sold in 20X1 was $2,812,500. Discussions between the marketing and manufacturing organizations indicate that although production costs are expected to drop, selling prices will also drop in parallel. As a result, the cost of goods sold in 20X2 will remain at the same percentage of sales as in 20X1.

Selling expenses were $265,000 in 20X1. The marketing organization expects that because of increasing competition, selling expenses, as a percentage of sales, will increase 0.30% next year. This means, for example, if the selling expenses were 5.00% of sales in 20X1, the selling expenses would be 5.30% of sales in 20X2.

General and Administrative (G&A) expenses were $250,000 in 20X1. Discussions between the CFO's office and the managers of the various divisions indicate that in order to improve the companys financial well being, general and administrative expenses will be held to an increase of only 10% in 20X2 over the value in 20X1.

Fixed expenses were $325,000 in 20X1. They are expected to increase 10% in 20X2 over the value for 20X1.

Depreciation expenses were $80,000 in 20X1. They are expected to increase 8% in 20X2 over the value for 20X1.

Interest paid on short-term notes was $8,500 in 20X1, and interest on long-term debt was $22,000 in 20X1. Both of these are expected to increase 5% in 20X2 from their values in 20X1.

The tax rate will remain at 40%. Cortino has not deferred paying taxes in the past, nor does it plan to do so in the future.

There will be no change in the dividends paid to holders of preferred stock, which were $100,000 in 20X1. Dividends paid to holders of common stock amounted to $300,000 in 20X1 and are planned to increase by 10% in 20X2 over the value in 20X1.

Balance Sheet

Cash and equivalents at the end of 20X1 amounted to $1,100,000 and are expected to increase in 20X2 by the same percentage rate as sales.

Accounts receivable was $885,600 at the end of 20X1, and accounts payable was $410,000 at the end of 20X1. Both of these are expected to keep pace with sales. That is, the percentage increases in accounts receivable and accounts payable in 20X2 will be the same as the percentage increase in sales in 20X2.

Inventory was $750,000 at the end of 20X1. Because of improvements in logistics management, the value of inventory at the end of 20X2 will be reduced by 5% from its value at the end of 20X1.

The value of other current assets was $10,000 at the end of 20X1 and is expected to increase by 20% by the end of 20X2.

The companys investment in plant and equipment was $1,428,000 at the end of 20X1. The company expects to invest $100,000 in plant and equipment in 20X2. The accumulated depreciation for the companys plant and equipment at the end of 20X1 was $750,000.

Short-term notes payable was $135,000 at the end of 20X1. Its expected to increase in 20X2 at the same percentage rate as sales.

Other current liabilities amounted to $35,000 at the end of 20X1 and are expected to increase by 20% by the end of 20X2.

The companys long-term debt was $378,600 at the end of 20X1 and is expected to increase to $458,000 by the end of 20X2.

The equity of holders of preferred stock will remain constant at $250,000. The par value of Cortinos common stock is $1/share, and the number of outstanding shares will remain at 1 million. Paid-in capital in excess of par on common stock was $1,150,000 at the end of 20X1 and will remain at that value in 20X2.

Accumulated retained earnings amounted to $65,000 at the end of 20X1.