Review 12-1 101 The FY2016 income statement and balance sheet for General Mills, a competitor of P&G, follow. Use them to answer the required questions. MBC Required a. In what order do we forecast the financial statements? Explain why this order is important. b. What income statement amount do we forecast first? c. Identify at least three forecasted expenses that are directly or indirectly related to revenue. d. Identify at least three forecasted balance sheet accounts that are directly or indirectly related to forecasted revenue. e. Why would we perform a sensitivity analysis of our forecasted numbers? GENERAL MILLS INC. Consolidated Statements of Earnings 12 Months Ended $ millions May 29, 2016 Net sales......................... ........ .............. .. $16.563.1 Cost of sales....... 10,733.6 Selling, general, and administrative expenses.. 3,118.9 Divestitures (gain) ........ (148.2) Restructuring, impairment, and other exit costs....... 151.4 Operating profit ................... 2,707.4 Interest, net ............. 303.8 Earnings before income taxes and after-tax earnings from joint ventures. . . . . . . . 2,403.6 Income taxes ...... ... 755.2 After-tax earnings from joint ventures ........... ............. 88.4 Net earnings, including earnings attributable to redeemable and noncontrolling interests ............................................ 1,736.8 Net earnings attributable to redeemable and noncontrolling interests .......... 39.4 Net earnings attributable to General Mills ......... .....................$ 1,697.4 GENERAL MILLS INC. Consolidated Balance Sheet $ millions, except par value May 29, 2016 Current assets Cash and cash equivalents..... Receivables .. Inventories ................ Prepaid expenses and other current assets Total current assets.... Land, buildings, and equipment. ... Goodwill. Other intangible assets......... Other assets Total assets. ............. ..... $763.7 . 1,360.8 . 1,413.7 399.0 3,937.2 3,743.6 8,741.2 4,538.6 751.7 .......... $21,712.3 $ millions, except par value May 29, 2016 Current liabilities Accounts payable ............................. .......... $ 2,046.5 Current portion of long-term debt ....... 1,103.4 Notes payable............... ....... 269.8 Other current liabilities ..... ..... 1,595.0 Total current liabilities.. .. 5,014.7 Long-term debt 7,057.7 Deferred income taxes......... ..... 1,399.6 Other liabilities ..................... 2,087.6 Total liabilities ...................................................... 15,559.6 Redeemable interest value.... ........... 845.6 Stockholders' equity Common stock, 754.6 shares issued, $0.10 par value 75.5 Additional paid-in capital......... 1,177.0 Retained earnings ......... 12,616.5 Common stock in treasury, at cost ......... (6,326.6) Accumulated other comprehensive loss. (2,612.2) Total stockholders' equity ...... 4,930.2 Noncontrolling interests ........ 376.9 Total equity.. 5,307.1 Total liabilities and equity ........ $21,712.3 Solution on p. 12-68. Forecasting the Income Statement lecture 102 MBC Forecast revenues and the income statement Exhibit 12.2 presents the FY2016 income statement for Procter & Gamble together with our forecast of the statements for FY2017. Overview Here is a high-level overviewcomputational details follow. Sales estimate. The forecasting process begins with an estimate of the sales growth rate. For our illustration, we assume a 1% growth ratewe later discuss the factors that explain this growth rate estimate. Given the assumed 1% growth in sales, forecasted 2017 sales are $65,952 million ($65,299 million X 1.01). Expense estimates. To estimate operating expenses (cost of goods sold and selling, general, and administrative [SG&A] expenses) we apply a percentage of sales ratio to forecasted sales. For nonoperating expenses (such as interest expense and interest revenue), we assume they will not change ("no change) unless we believe interest rates are likely to shift greatly during the forecast period. One-time item estimates. One-time items such as discontinued operations, are, by definition, not expected to recur. We forecast these items to be SO. Tax estimate. Income tax expense is forecasted based on a percentage of pretax income. Noncontrolling interest estimate. A common assumption is no change in the ratio of noncon- trolling interest to consolidated net income. For our P&G illustration, we adopt that assumption. For each line item in the income statement, we summarize our forecasting assumptions in the right- most column of Exhibit 12.2, and we discuss those assumptions in depth in the following sections. Review 12-1 101 The FY2016 income statement and balance sheet for General Mills, a competitor of P&G, follow. Use them to answer the required questions. MBC Required a. In what order do we forecast the financial statements? Explain why this order is important. b. What income statement amount do we forecast first? c. Identify at least three forecasted expenses that are directly or indirectly related to revenue. d. Identify at least three forecasted balance sheet accounts that are directly or indirectly related to forecasted revenue. e. Why would we perform a sensitivity analysis of our forecasted numbers? GENERAL MILLS INC. Consolidated Statements of Earnings 12 Months Ended $ millions May 29, 2016 Net sales......................... ........ .............. .. $16.563.1 Cost of sales....... 10,733.6 Selling, general, and administrative expenses.. 3,118.9 Divestitures (gain) ........ (148.2) Restructuring, impairment, and other exit costs....... 151.4 Operating profit ................... 2,707.4 Interest, net ............. 303.8 Earnings before income taxes and after-tax earnings from joint ventures. . . . . . . . 2,403.6 Income taxes ...... ... 755.2 After-tax earnings from joint ventures ........... ............. 88.4 Net earnings, including earnings attributable to redeemable and noncontrolling interests ............................................ 1,736.8 Net earnings attributable to redeemable and noncontrolling interests .......... 39.4 Net earnings attributable to General Mills ......... .....................$ 1,697.4 GENERAL MILLS INC. Consolidated Balance Sheet $ millions, except par value May 29, 2016 Current assets Cash and cash equivalents..... Receivables .. Inventories ................ Prepaid expenses and other current assets Total current assets.... Land, buildings, and equipment. ... Goodwill. Other intangible assets......... Other assets Total assets. ............. ..... $763.7 . 1,360.8 . 1,413.7 399.0 3,937.2 3,743.6 8,741.2 4,538.6 751.7 .......... $21,712.3 $ millions, except par value May 29, 2016 Current liabilities Accounts payable ............................. .......... $ 2,046.5 Current portion of long-term debt ....... 1,103.4 Notes payable............... ....... 269.8 Other current liabilities ..... ..... 1,595.0 Total current liabilities.. .. 5,014.7 Long-term debt 7,057.7 Deferred income taxes......... ..... 1,399.6 Other liabilities ..................... 2,087.6 Total liabilities ...................................................... 15,559.6 Redeemable interest value.... ........... 845.6 Stockholders' equity Common stock, 754.6 shares issued, $0.10 par value 75.5 Additional paid-in capital......... 1,177.0 Retained earnings ......... 12,616.5 Common stock in treasury, at cost ......... (6,326.6) Accumulated other comprehensive loss. (2,612.2) Total stockholders' equity ...... 4,930.2 Noncontrolling interests ........ 376.9 Total equity.. 5,307.1 Total liabilities and equity ........ $21,712.3 Solution on p. 12-68. Forecasting the Income Statement lecture 102 MBC Forecast revenues and the income statement Exhibit 12.2 presents the FY2016 income statement for Procter & Gamble together with our forecast of the statements for FY2017. Overview Here is a high-level overviewcomputational details follow. Sales estimate. The forecasting process begins with an estimate of the sales growth rate. For our illustration, we assume a 1% growth ratewe later discuss the factors that explain this growth rate estimate. Given the assumed 1% growth in sales, forecasted 2017 sales are $65,952 million ($65,299 million X 1.01). Expense estimates. To estimate operating expenses (cost of goods sold and selling, general, and administrative [SG&A] expenses) we apply a percentage of sales ratio to forecasted sales. For nonoperating expenses (such as interest expense and interest revenue), we assume they will not change ("no change) unless we believe interest rates are likely to shift greatly during the forecast period. One-time item estimates. One-time items such as discontinued operations, are, by definition, not expected to recur. We forecast these items to be SO. Tax estimate. Income tax expense is forecasted based on a percentage of pretax income. Noncontrolling interest estimate. A common assumption is no change in the ratio of noncon- trolling interest to consolidated net income. For our P&G illustration, we adopt that assumption. For each line item in the income statement, we summarize our forecasting assumptions in the right- most column of Exhibit 12.2, and we discuss those assumptions in depth in the following sections