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  2.  Projected financial statements is a tool of the company to set an overall goal of what the company’s performance and position will be for and as of the end of the year. It sets targets to control and monitor the activities of the company. Forecast or calculate the following reports:  Projected Income Statement  Projected Statement of Financial Position
  3. Application of the Projected Financial Statements Approachbe  Step 1. Forecast the Income Statement a. Establish a sales projection b. Project the cost of sales c. Prepare the production schedule and project the corresponding productioncosts, d. direct materials, direct labor and overhead for manufacturing companies) e. Estimate selling and administrative expenses. f. Consider financial expenses if any g. Determine the net profit
  4. Step 2. Forecast the Statement of Financial Position. a. Project the assets needed to support projected sales. b. Project funds generated (through accounts payable and accruals) and byretained earnings through profits generated. c. Project liability and stockholder’s equity accounts that will not rise spontaneously with sales (e.g., notes payable, long-term bonds, preferred stock, and ordinary shares) but may change due to financing decisions madelater. d. Determine if additional funds needed by using the following formula.
  5.  Additional Funds Needed (AFN) = Required Increase in Assets - SpontaneousIncrease in Liabilities - Increase in Retained earnings  The additional financing needed raised by borrowing from the banks as notes payable, by issuing long-term bonds by selling new ordinary shares or bysome combination of these actions
  6. Step 3. Raising the Additional funds needed.  Step 3. Raising the Additional funds needed. a. Target capital structure: b. Effect of short-term borrowing on its current ratio; c. Conditions in the debt and equity markets; or d. Restrictions imposed by existing debt agreements.
  7. Step 4. Consider financing feedbacks.  Depending on whether additional funds borrowed or has raised through ordinary shares, consideration has given on additional interest in the income statement or dividends, thus decreasing the retained earnings.  Illustrative Case: Financial Forecasting (Percent of Sales Method)
  8. The Mellinial Company has the following statements representative of thecompany’s historical average. Sales P 2,000,000 Cost of Sales (1,200,000) Gross profit 800,000 Operating expenses 380,000) Earnings before interest and taxes 420,000 Interest expense 70,000 Earnings before taxes 350,000 Taxes (35%) (122,500) Net Income/Earnings after taxes P 227,500 Dividends P 136,500 Mellinial Company Income Statement For the year ended Dec. 31, 2019
  9. Mellinial Company Income Statement For the year ended Dec. 31, 2019
  10. Solution:
  11. Supporting computations: (1) Cash = 2.5% x P 2.4M sales (2) Accounts receivable = 20% of 2.4M (3) Inventory = 37.5% x P 2.4 M (4) No percentages computed for fixed assets, notes payable, long-term debt, ordinary shares and retained earnings because they are not assumed to maintain a direct relationship with sales volume. For simplicity, depreciation is not explicitly considered. (5) Accounts payable = 12.5% of 2.4M (6) Accrued expenses = 0.5% of P 2.4M (7) Accrued taxes = 1% of P 2.4M (8) Retained earnings = P 300,000 + P 282,100 – P 101,600
  12. Formula Method * Additional Financing needed (AFN) may also be computed as follows: Additional funds needed = required increase in assets – Spontaneous increase in liabilities – Increase in retained earnings Where: Required increase in assets = Change in Sales x Current Assets (present) Sales (present) Spontaneous increase = Change in Sales x Current Liabilities (present)in liabilities Sales (present) Increase in retained earnings = Earnings after taxes - Dividend Applied to Millenial Co., AFN computed as follows: