Forecasting Exercise Income Statement Forecasting 1.The most important part of the forecast is the Sales growth. Apple's growth has been all over the place in the last few years, but currently analysts are forecasting a 7.5% increase in Sales for 2022. Let's assume they are correct, but that this growth rate is unsustainable in the long run. We will fade it down to a 4% long term growth rate by assuming the following growth rates in the next five years: 7.5% for the next two years, 5.5% for the two years after that, and 4.5% for the final year. 2.Assume that future Cost of Goods Sold and SG&A remain the same percentage of current yearSales as in 2021. We do this by setting the 2022 COGS equal to the ratio of 2021 COGS to Sales multiplied by 2022 Sales. Then do the same with SG&A. 3.Research and Development Expense is a difficult account to forecast. Many companies budget R&D based on previous or current sales, which sounds like bad planning. For Apple, there is no clear relationship between previous or current sales and R&D, but R&D has been growing at around 17% per year. Assume that future R&D expense will continue growing at 17% in each subsequent year. 4.Assume that future Depreciation Expense remains the same percentage ofprior year PP&E -Net. We do this because it is the original cost of Plant, Property and Equipment that eventually flows into Depreciation Expense. Note that we don't yet have reference numbers for PP&E to calculate these expenses for 2023 and beyond. That is not a problem - enter the formulas into the cells anyway. You will get some 0s and/or #div/0s! but they will go away later.
5.Assume that future Interest Expense remains the same percentage ofprior yearCurrent Portion of Long-Term Debt and Long-Term Debt (there are two accounts on the balance sheet) as in 2021. We do this because interest expense is paid on the outstanding debt balance each year. 6.Assume that future Other Income/Expense remains the same percentage ofprior year Marketable Securities (Current and Non-Current - there are two accounts on the balance sheet) as in 2021. We make this assumption because the other income mostly represents returns on marketable securities. 7.Although recent U.S. tax reform brought the statutory rate corporate income tax rate to 21%, many companies have numerous ways to reduce this rate. Apple's prior year effective tax rate was 13.3%. Assume that future Tax Expense remains the same percentage ofcurrent yearPretax Income as in 2021 (the ratio of 2021 Tax Expense to Pretax Income multiplied by 2022 Pretax Income). ***Take time now to check your Income Statement against the file Forecasting Exercise Solution Before Assets, because the income statement will change as you start entering assets. You will probably only be able to check the first two years because the Div/0! lines won't allow subtotals or a net income number to be calculated for the subsequent years (my solutions have subtotals only because I worked backwards, deleting things from the final solution)*** Balance Sheet Forecasting Assets 1.Assume that Cash remainsconstantin future years (we will alter this assumption at the very end of making our balance sheet).
2.Assume that future Marketable Securities - Current remain constant in all future years. We do this because we have no better assumption without digging into Apple's disclosures or directly asking managers what their strategy is with this huge asset. Jump down and make the same assumption for Marketable Securities - Non-Current. Then, check out your Other Income/Expense in the income statement after you fill in these two formulas for future years. That line item should now be populated with numbers. 3.Assume that future Accounts Receivable remains the same percentage ofcurrent year Sales as in 2021. We do this because receivables are amounts owed by customers on sales that were made during the year. 4.Assume that future Inventories remain the same percentage ofcurrent yearCost of Goods Sold as in 2021. We do this because inventories are built up to facilitate sales, which flow into COGS. 5.Assume that Vendor Non-Trade Receivables remain the same percentage ofcurrent year Cost of Goods Sold as in 2021. Apple's footnotes indicate these receivables arise from raw materials it sells to its manufacturers to assemble its products. Therefore, the flow of manufacturing costs should drive these receivables. 6.Assume that Other Current Assets remainconstantin future years. We do this because Apple indicates that this item may include derivatives, deferred taxes, restricted cash, and other amounts that are difficult to forecast and fluctuate randomly. 7.Assume that future Plant, Property and Equipment - Net remains a constant percentage of current yearsales as in 2021. Ignore PP&E - Gross and Accumulated Depreciation (leave these lines blank). We make this assumption because PP&E is used to generate sales (e.g., Apple Stores) and should mostly grow along with sales. We will come back
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