FINA 321 Ch 9 – Text book Abdullah Al Shukaili Prospective analysis FINA 321 Ch 9 – Text book Abdullah Al Shukaili

Learning objective Describe the importance of prospective analysis. Explain the process of projecting the income statement, the balance sheet, and the statement of cash flows.

Purpose of prospective analysis Prospective analysis is the final step in the financial statement analysis process It can be undertaken only after the historical financial statements have been properly prepared to accurately reflect the economic performance of the company Prospective analysis includes forecasting of the balance sheet, income statement and statement of cash flows

Its usefulness estimates of future financial statements estimate current stock price examine the viability of companies’ strategic plans analyze whether a company will be able to generate sufficient cash flows from operations to finance expected growth or whether it will be required to seek debt or equity financing in the future assess a company’s ability to meet its debt service requirements.

Steps for forecasting Assumption start by looking to the previous years how much was the growth rate? Or did the company have a higher or a lower growth in previous years. To know the growth rate apply the following formula { Current year – last year } / Last year