In March 2016, Adam Stark was considering the possibility of investing in Cisco Systems, Inc. (Cisco). He knew that in recent years the company's sales had been growing, despite some fluctuations in the company's cost structure. However, Stark was unsure whether this trend would continue and how it might impact Cisco's future earnings-and thus Stark's investment. Therefore, he wanted to ensure that, at least in the short term, the company would perform similar to its performance in recent years. FINDING VALUE IN INCOME STATEMENTS A company's income statement shows the inflow and outflow of cash during a specific period (typically over one quarter or one year). Different companies might use slightly different terms in their financial statements (see Exhibit 1). The income statement can provide useful information when compared with the income statements of previous periods. For example, Cisco's income statement showed that the firm's sales income had dropped since the previous quarter, in October 2015, while its net income had increased substantially. Such analysis showed that the company was able to decrease its costs as a percentage of its revenues (see Exhibit 2). Furthermore, an increasing or decreasing trend in cash flows might be an indicator of the company's strategy and stability. For example, investors wanted a company to show an increasing trend in sales, which would enable investors to predict the performance of the firm in the future and thereby be better able to evaluate the potential downside risk of their investment. TIME SERIES-LINEAR TRENDS To capture any potential trend in a company's cash flow, it was necessary to use time series data. Stark knew that he could model and forecast the trend in time series data by including the historical data as a predictor of the future data. However, depending on the forecast errors, Stark might end up with some unrealistic values for the company's future cash flows. document is authorized for use only in Prof. Johan's FIN 6806 Prof. Johan Spring 2020 PMBA Term 1 at Florida Atlantic University from Jan 2020 to Jul 2020.