FINANCE IN A CANADIAN SETTING Sixth Canadian Edition

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FINANCE IN A CANADIAN SETTING Sixth Canadian
Edition

• Lusztig, Cleary, Schwab

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• CHAPTER FOUR
• Funds-Flow Analysis and Financial Forecasting

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Learning Objectives

• 1. Recognize why statements of changes in
  financial position are important.
• 2. Describe the two ways of preparing statements
  of changes in financial position.
• 3. Explain what an increase or decrease in funds
  means in a statement of sources and uses of
  funds.
• 4. Discuss how an activity format evaluates a
  firms cash flow.
• 5. Describe how pro forma statements are used as
  planning tools.

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Introduction

• Two methods of assessing business performance are
  discussed
• Statement of changes in financial position (SCFP)
• Provide insight into where a firms funds have
  been used and come from
• Pro forma financial statements
• Assists management in forecasting a firms future
  financial position

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Statement of Changes in Financial Position

• The two methods of reporting SCFP are
• Sources and Uses of Funds
• compares the balance sheets of a company at two
  different times
• Recognizes all changes in balance sheet accounts
• Any ? in asset accounts or ? liability accounts
  represent a use of funds
• Source of funds? assets ? liabilities ?
• Use of funds ? assets ? liabilities ?

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Statement of Changes in Financial Position

• Funds-Flow Based on Activity
• Categorizes the flow of funds according to major
  activities including cash flow, financing and
  investments
• Useful in analyzing a firm liquidity
• The 3 functional areas include
• 1. Operations
• 2. Long-term financing
• 3. Investments

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Pro Forma Financial Statements

• Used in projecting future balance sheets and
  income statements
• Several different techniques exist in forecasting
  accounts such as
• sophisticated estimation techniques
• historical projections
• Tedious to construct due to future uncertainties

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Pro Forma Financial Statements

• Preparation begins with forecasting revenues by
  marketing personnel by using a(n)
• - Internal approach
• - External approach
• - Combination of both

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Pro Forma Financial Statements

• From the revenue forecast, other related items in
  financial statements can be determined based on
  historical proportions of sales such as
• - Cost of good sold (COGS)
• - Inventory
• - Accounts receivable

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Summary

• 1. Statements of changes in financial position
  can be prepared using either a source and uses
  format or an activity format, with both providing
  essentially equivalent information.
• 2. A statement of sources and uses of funds is
  derived by comparing the balance sheet of a firm
  at two different points in time. It provides
  information about a firms investment over the
  period under consideration and how such
  investments were financed.

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Summary

• 3. An activity format summarizes the various
  flows of funds in terms of their effect on the
  firms cash position over a given time period.
  The resulting funds-flow statement, which is
  widely used by creditors, is particularly useful
  in highlighting the firms liquidity position.
• 4. Any increase in an asset or decrease in a
  liability represents a use of funds. Similarly,
  any decrease in an asset or liability represents
  a source of funds.

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Summary

• 5. Projected financial statements, also called
  pro forma statements, can be used as planning
  tools. In projecting financial statements, the
  forecast of sales or revenues is the basic
  forecast from which most other entries are
  derived.