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Financial Forecasting and Decision Making

Financial Forecasting and Decision Making

Wallace Davidson, III

ISBN: 978-1-119-51425-1

Mar 2018

224 pages



Many companies fail to succeed due to poor planning, which is one reason why accountants are in big demand. Skilled at forecasting, accountants can plan a company's future by determining the maximum sustainable growth and predict its external fund requirements. This book provides you with the basic tools necessary to project the balance sheet and statements of income and cash flow, enabling you to add a unique value to your client(s) work.

This book will prepare you to do the following:

  • Recall the basics of planning and forecasting financial statements
  • Recall considerations related to a basic forecasting model
  • Identify the evidence of growth mismanagement and develop the skills to determine maximum sustainable growth
  • Apply statistical procedures to forecasting
  • Analyze projected or forecasted financial statements

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Chapter 1 1-1

Forecasting Prerequisites 1-1

An Overview of the Forecasting Process 1-2

More on the Forecasting Process 1-4

Budgets Versus Forecasted Financial Statements 1-6

Financial Planning Prerequisites 1-7

Corporate Growth 1-9

Value of a Company 1-10

Chapter 2 2-1

Using the Basic Forecasting Model 2-1

Making Assumptions 2-2

Percent of Sales and Sales Forecasts 2-3

The Basic Forecasting Model 2-4

Explanation of the Basic Model 2-6

Identification of Spontaneous and Quasi-spontaneous Accounts 2-7

The Basic Model: An Example 2-8

Using the Basic Model for Planning 2-11

The Basic Model: Sensitivity Analysis 2-12

The Zeta Company Case Study 2-13

The Balance Sheet: Percent of Sales Method 2-15

Forecasting the Balance Sheet: An Example 2-16

Using the Projected Balance Sheet for Decision Making: Capital Structure Decision 2-18

Methods of Financing EFN 2-19

Using the Projected Balance Sheet for Decision Making: Working Capital Decisions 2-20

Using the Projected Balance Sheet for Decision Making: Retention Decisions 2-22

Problems and Limitations Associated with the Basic Model 2-23

Case Study 2-24

Chapter 3 3-1

Management Uses of the Forecasting Technique: A Case Analysis on Working Capital Planning 3-1

The Davidson Toy Company 3-2

Chapter 4 4-1

Using Forecasting to Plan the Company’s Capital Structure 4-1

Value of the Firm 4-2

The Effect of Debt on the Cost of Capital 4-3

Other Factors: Bankruptcy Costs 4-6

Financing the Expected Funds Needed (EFN): Capital Structure Theory 4-7

Relation of Cost of Capital and Value to Debt Ratio 4-8

Optimal Capital Structure 4-9

Factors Influencing Debt Usage 4-10

Short Versus Long-Term Debt 4-11

Case Studies 4-12

Chapter 5 5-1

Forecasting the Balance Sheet: Statistical Procedures 5-1

Statistical Procedure Regression 5-2

Advantages of Regression Analysis 5-3

Finding a Trend Line with Two Data Points 5-4

Regression Analysis 5-6

Using Regression: An Example 5-7

Regression and Forecasting the Balance Sheet: An Example 5-9

Using Regression to Forecast the Income Statement 5-13

Chapter 6 6-1

Forecasting the Income Statement 6-1

How Expenses Vary with Sales Changes 6-2

The Income Statement Percent of Sales Method 6-3

Finding Fixed and Variable Expenses Graphically 6-5

Using Regression to Determine Fixed and Variable Expenses 6-7

Example of Using Regression to Determine Expense Components 6-8

Forecasting the Income Statement 6-9

Case Study 6-10

Chapter 7 7-1

Reconciling the Income Statement and Balance Sheet 7-1

Why There Must Be a Reconciliation 7-2

Reconciliation of the Income Statement and the Balance Sheet 7-3

Reconciliation: A Complete Example 7-6

Forecasting and Reconciling the Income Statement: An Example 7-7

Reconciliation: An Example 7-9

Reconciliation: A Second Example 7-11

Case Study 7-13

Chapter 8 8-1

Evidence of Growth Mismanagement 8-1

Evidence of Growth Mismanagement 8-2

Fixed Assets to Net Worth 8-3

Net Sales to Net Worth: The Trading Ratio 8-5

The Trading Ratio of Company A: An Example 8-6

Other Important Ratios to Monitor During Periods of Growth 8-13

Case Study 8-14

Chapter 9 9-1

Maximum Sustainable Growth 9-1

The Basic Model: Maximum Sustainable Growth 9-2

The Sustainable Growth Model 9-3

Maximum Sustainable Growth: An Example 9-4

Maximum Sustainable Growth: A Second Example 9-6

Improving Sustainable Growth 9-8

Case Study 9-10

Sustainable Growth: Available External Equity 9-11

Sustainable Growth with Regression 9-12

Chapter 10 10-1

Forecasting Sales 10-1

Forecasting Sales: Sales Goal 10-2

The Best Guess Forecast: Bottom-up 10-3

Compound Growth: An Example of Forecasting Sales 10-4

Fluctuating or Cyclical Sales 10-8

Using Regression to Predict Sales 10-9

Forecasting Sales: Regression Approach 10-10

Quick Mart Lumber Company 10-11

Case Study 10-12

Chapter 11 11-1

Integrating the Percent of Sales with a Shorter-Term Forecast of Cash Needs 11-1

Shorter-Term Cash Needs 11-2

Appendix A A-1

The Basic Forecasting Model A-1

Glossary 1

Index 1

Solutions 1

Chapter 1 Solutions 1

Chapter 2 Solutions 2

Chapter 3 Solutions 5

Chapter 4 Solutions 9

Chapter 5 Solutions 11

Chapter 6 Solutions 12

Chapter 7 Solutions 14

Chapter 8 Solutions 17

Chapter 9 Solutions 21

Chapter 10 Solutions 22

Chapter 11 Solutions 24

Recent Developments

Users of this course material are encouraged to visit the AICPA website at to access supplemental learning material reflecting recent developments that may be applicable to this course. The AICPA anticipates that supplemental materials will be made available on a quarterly basis. Also Financial Reporting Center which include recent standard-setting activity in the areas of accounting and financial reporting, audit and attest, and compilation, review and preparation.