Extra Credit Assignment - Case Study: Forecasting Financial Statements & Ratios

Due Friday, April 24, 2020

90 Points

Case Overview

Ben Francis has decided to start an Internet business selling quality workout gear in the upcoming year. He believes that his products are innovative and tending well and is seeking a business loan. Therefore, Ben is in the process of putting together a business plan. As part of the business plan process, Ben must include forecasted financial statements for the first 5 years. The forecasted financial statements to be included are: Income Statement, Balance Sheet, and Statement of Cash Flows.

Forecasting Assumptions

First year sales are projected to be $100,000 and grow/decline at the following rates:

Year 1 - Year 2

+ 2%

Year 2 - Year 3

-4%

Year 3 - Year 4

+10%

Year 4 - Year 5

+ 5%

Cost of sales are projected based on percentage of revenue as follows:

Year 1 - Year 2

45%

Year 2 - Year 3

56%

Year 3 - Year 4

42%

Year 4 - Year 5

42%

Advertising expenses are projected to be 3% of each year's projected revenue.

Ben will outsource the creation and maintenance of his proprietary website with an outsourcing contract starting at $5,000 in year one and a 3% escalation clause each year.

A part-time assistant will be hired stating on day one/year one for $20,000 per year.

Office rent is estimated to be a flat rate of $1,500 per month under a five-year lease agreement with no escalation clause for the duration of the lease.

Utilities for the rented office space are estimated to be $250 per month.

The office space be to rented is unfurnished. The company will purchase $8,000 worth of furniture and fixtures at the beginning of Year 1. The furniture and fixtures will have a useful life of 15 years. The company will also purchase some computers and other office equipment for $10,000 also at the beginning of Year 1. The office equipment will have a useful life of 5 years. Both the furniture and fixtures as well as the equipment will be depreciated on a straight-line basis (Assume zero salvage value for calculations).

A 5-year bank loan will be negotiated for $75,000. The estimated interest on the loan is 2% (assume simple interest). It will be paid back in $15,000 installments starting in Year 2. Interest is due at the end of each year and paid in January of the following year.

The tax rate is 25%. Taxes for the year just ended are payed in the first quarter of the following year.

Ben will invest $10,000 of her own money and from family and friends to start the business. This $10,000 investment of capital is also the beginning bank balance of Year 1.

Accounts Receivable at year end is equal to 30 days of sales.

Accounts Payable at year end is equal to 45 days of purchases (cost of sales)

At the end of Year 2, the company will purchase an insurance policy to help cover the business. The policy has a term of 3 years and coverage starts at the beginning of Year 3. The policy costs $5,000.

Additional Instructions

You must use the given Excel template attached to this assignment.

The three financial statements are interconnected. Where applicable, reference the appropriate cells from other tabs. Also, use formulas within the cells where applicable. (Instructors may deduct points for not using cell references and formulas.)

Some cells have additional notes (cells marked with a red triangle in the upper right-hand corner; hover over the triangle to see the note).

The shaded areas are for data input. (NOTE: You will need to enter formulas to calculate subtotals on the 'Cash Flow Statement' tab for each major category)

On each tab there is an area to keep track of the various assumptions. The column labeled 'Assumptions' is to make note of any numbers, percentages, etc. relevant to that line item. The column labeled 'Assumption Explanations' is to help keep track of the 'Forecasting Assumptions' from above. (You can copy and paste the assumptions onto the relevant line item). On the 'Ratios' tab there is an area to layout the formulas and show your work.

There is a grading area on each tab that is being calculated as you input information. Please use this area to see where any mistakes are being made.

Income Statement

Revenue

Cost of Sales

Gross Margin

Operating Expenses

Advertising

Website/Content Creation

Wages

Office Rent

Utilities

Insurance Expense

Depreciation

Operating Income

Interest Expense

Income before taxes

Income taxes

Net Income/(Loss)

Balance Sheet

Assets

Cash

Accounts Receivable

Prepaid Insurance

Current Assets

Furniture & Fixtures (net)

Equipment (net)

Total Assets

Liabilities

Accounts payable

Interest payable

Taxes payable/(receivable )

Current Liabilities

Bank loan

Total Liabilities

Stockholder's Equity

Capital

Retained Earnings

Total Stockholder's Equity

Total Liabilities & Stockholder's Equity

Cashflow Statement

Net Income

Add back depreciation

Changes in working capital

Accounts Receivable

Prepaid Expenses

Accounts Payable

Interest payable

Taxes Payable

Cash flows from operating activities

Amount paid for equipment

Amount paid for furniture & fixtures

Cash flow from investing activities

Proceeds from bank loan

Proceeds from issuing capital

Repayment of bank loan

Cash flow from financing activities

Net increase (decrease) in cash

Add: Beginning cash balance

Ending Cash balance

Must show all work!