Projection of Financial Requirements

Direct vs Indirect Costs Direct Material Direct Labor Indirect Material/Labor Fixed General/Admin Selling Profit Conversion cost Selling Price Prime costs Factory Overhead Cost of goods manufactured Cost of goods sold

Balance Sheet Liabilities probable future sacrifices of economic benefits as result of current obligations Current Liabilities - must be paid within 1 yr. Owner Equity ownership right of proprietors or stockholders Changes in OE by investment by owner earnings from profitable operation of business withdrawals of cash of other assets losses from business

Accounting Equation Owner Equity = Assets - Liabilities

Income Statement Projects profit/loss of an entity over a period of time Net Sales - gross sales less returns, defects, etc. Cost-of-Goods sold - cost of raw material & direct labor Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers,...) Interest Expense - interest paid on long/short term debt. Net Income/share - net income (after tax) divided by outstanding shares

Income Statement Revenues Cost of Sales Gross Margin Op. Expenses Op. Profit/Loss Taxes Net Profit/Loss - = - = - =

Changes to Owner Equity Begin Balance - last year’s ending balance Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share. common stock = 10,000 x $10 = $100,000 addition paid in =10,000 x ($19-$10) = $ 90,000 Retained Earnings - cumulative net income which has been retained for business Dividends - distribution of earnings to stockholders

Changes to Owner Equity Balance SheetIncome StatementBalance Sheet 8/31/96 Revenues 8/31/97 - Expenses Net Income Statement of OE A =L +OE Begin Balance Paid in capital changes Retained earnings + Net Income - Dividends Ending BalancesA = L + OE

Retained (97) = Retained (96) + $18,000 = $93,900

Statement of Cash Flows Identify the sources and use of cash during year Operating Activities net income $18,000 from income statement depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay

Financial Projections Pro forma financial statements Cash Budgets Operating Budgets

Sales Budget Production Budget Direct Material Factory Overhead Direct Labor Cost of Good Sold Budget Selling Expense Admin Expense Budgeted Income Budgeted Balance Desired Ending Inventory Capital BudgetCash Budget

Sales Forecast

Example

Example (cont.)

Selling & Admin Expenses

Cash Budget

Budget Income

Pro-forma Balance