Financial Forecasting and Decision Making

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

Wallace N. Davidson, III, Ph.D., CMA, is a professor at Southern Illinois University, Carbondale with 25 years experience in corporate finance. He previously served as a financial analyst in the utility industry. Dr. Davidson is an accomplished author of several continuing education seminars for the AICPA, including the popular "Financial Statement Analysis: Basis for Management Advice." Twice recognized as an AICPA Outstanding Discussion Leader, Dr. Davidson speaks nationally to business organizations and state societies.