Managerial Auditing Journal

Forecasting sales, expenses and stock market values by quarterly financial statement ratio analysis: a
microcomputer software development model
Avi Rushinek Sara F. Rushinek
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To cite this document:
Avi Rushinek Sara F. Rushinek, (1995),"Forecasting sales, expenses and stock market values by quarterly financial
statement ratio analysis", Managerial Auditing Journal, Vol. 10 Iss 2 pp. 7 - 33
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 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
Forecasting sales, expenses and
stock market values by quarterly
financial statement ratio analysis:
a microcomputer software development model
Avi Rushinek and Sara F. Rushinek
A model for Applied Magnetic Corp and the electronic and electrical equipment industry
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)
Introduction
Standard industry classifications of financial ratios
knowledge base
Users of standard industry financial ratio knowledge base
The standard industry classification of financial ratio
knowledge base (SICFRKB) is a database of financial
ratios. SICFRKB shows the financial strength of a
company and the success of its operations. SICFRKB
helps executives allocate resources better.
Government, private sector organizations, and individuals
will be able to use SICFRKB to estimate the GNP,
nation/industry and company income, expense and
financial position. The Federal Reserve Board can improve
industrial debt structure, liquidity and profitability. The
Treasury Department can estimate tax liability and the
IRS can evaluate and enforce compliance. The Council of
Economic Advisors and Congressional Committees can
design policies and draft better legislation. The Federal
Trade Commission can analyse the performance of
industries. Financial analysts can use SICFRKB to
evaluate investments. External auditors can conduct
analytical reviews using deviations from SICFRKB.
Internal auditors can spot weaknesses in internal control.
Management accountants, controllers and treasurers can
pinpoint substandard performance and set industry-wide
tested, realistic and attainable standards.
Educators and researchers can study all of the above and
use SICFRKB as a supplement to their classes. SICFRKB
can help research and educate in the areas of accounting,
finance, economics, computer information systems, and
law. For example, SICFRKB can directly relate to
financial, managerial, and forensic accounting as well as
tax, auditing, and management advisory services.
Managerial Auditing Journal, Vol. 10 No. 2, 1995, pp. 7-33
© MCB University Press Limited, 0268-6902
7
Use of SICFRKB by auditors, accountants, controllers and
treasurers
SICFRKB, a PC-based planning and analysis tool,
provides detailed and comprehensive forecast of US
industries in a (Lotus 123) software environment,
designed to support company specific financial statement
budgets. SICFRKB analytical features let you decide,
industry by industry, what the sales budget should be for
the next quarter. And, how should the standards for
expenses correspond to a given level of sales forecasts.
This way sales forecasts derived from the industry
averages provide a basis for allocating resources, setting
budgets, and making other key decisions.
Once the controllers or auditors have concluded the
consolidated financial statements forecast and budget, they
can refine it further by breaking it down into segments. The
controllers can segment the financials by product line,
geographical area, organizational divisions, etc. SICFRKB
will provide the standards ratios of each financial item to
sales. This way the controllers can set an attainable
standard of performance for the budget, initially, and later
conduct a variance analysis. Such a variance analysis will
help benchmark the company against the industry,
controlling costs and managing by exception. Likewise,
treasurers can forecast the stock market value impact of the
financial policies. This way they can quantify financial
outcomes of accounting policies.
The controller will define a standard as a benchmark for
measuring performance. These standards will evaluate
the inputs into the manufacturing process. Standards are
normally set by management, but the controller has to
evaluate them, to make sure that they are reasonable and
For a free copy of the software, additional references and
details, please write or fax a request to the authors at (305) 666-
7890.
 8 MANAGERIAL AUDITING JOURNAL 10,2
attainable. This study will assist controllers in setting up
attainable and effective standards, as well as applying
management by exception and deciding which variances
should be investigated. Typically, the controllers will
investigate only the exceptions, and defer the review of
the non-exceptional variances. This study will assist the
controllers in setting investigatory scale of priorities.
If you are a controller, for example, you could get a
complete financial statement ratio analysis (FSRA)
system in minutes. This approach lets you instantly
compare your business with the industry standard ratios
– and learn how you stack up. Hundreds of industry
average financial statements are all built into this system.
Just enter your company data on the left side of the
screen, and the program instantly computes the ratios on
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the right side of the screen. Enter your standard industry
classification (SIC) code, and the program produces a
correlation coefficient (a number between 0 and 100 per
cent), telling you the correlation between the company
and its industry. If the correlation between your company
and the industry is high (i.e. 90 per cent or higher), then
this industry is indeed a good model for your company.
This program uses a built-in database of dozens of
industry SIC code standard ratios derived from US
government data. If your company is highly correlated to
the industry, then you can use unadjusted industry data.
In this case, save your ratios for comparison with future
financial statements, with budgets – or with your hottest
competition. The program can forecast your sales for the
next quarter, and what your expenses should be
according to your industry. This way you can compare
your company to the industry and correct any problems
that you discover.
You can also modify the built-in database, or load up-to-
the-minute data from other external sources, in case the
data are not highly correlated with your company. Such
external sources may be Robert Morris Associates
(RMA), or Dun & Bradstreet (D&B).
Literature review
Comparing and adjusting industry to company financial
ratios
Industry benchmark averages affect a company’s financial
structure
For the sake of simplicity, this article will focus on sales
forecasts. For similar details about the stock market
value/price forecast, write or fax the authors.
The analysis is restricted to basic accounting variables,
such as sales, stocks, creditors, and current assets. The
sample covers about 2,000 companies in the UK. The
results show that the departure from proportionality that
is observed is primarily attributable to sector and size.
For the ratio that is studied, current assets to current
liabilities, the ratio for larger firms tends toward an
overall norm for the economy. The results do not support
the hypothesis of proportionality but indicate that
inferences about an average-size company’s financial
structure may be drawn directly from the financial ratio
by comparing it with an industry benchmark. We are
basing our own study on these proven findings[1].
Apply industry financial ratios to forecast individual
companies
This analysis provides basic information for simple
comparison of a few key financial ratios. Financial ratio
analysis is used extensively in evaluating a company’s
performance by credit lenders, credit rating agencies,
investors, and management. Ratios for a particular
company are compared to an industry average to
determine the relative success or failure of the firm.
Return of total investment is considered to be a key ratio
in measuring a company’s performance. Short-term
liquidity is best measured by the acid test ratio and the
current or working capital ratio. Long-term solvency is
best appraised by comparing a company’s amount of debt
as a percentage of stockholder’s funds. A ratio that shows
a company’s ability to service debt is the interest coverage
ratio. Other important measurements include the average
profit margin, sales to capital, stock turnover, and
debtor’s turnover.
This analysis also compares the financial performance of
45 UK industries. The frequency distributions are
compiled from a representative sample of 700 UK firms,
based on the 1977 accounting reports for those firms. We
are applying similar procedures to US, instead of UK
companies and industries, and expect similar findings.
We have adopted similar concepts of financial ratios, acid
tests, return on investment, current ratio and many
industries performance evaluations[2].
Representative ratio depicts an entire ratio factor (many
ratios)
An examination is made of financial ratios within the
context of a single, homogeneous industry. The findings
furnish some insight into the validity of using single-
industry ratio averages as standards to evaluate individual
firm performance. Factor analysis determines whether
these ratios group in the traditional category of ratios as
suggested in the financial statement analysis literature.
This was followed by a cluster analysis of the composite
ratios to determine stable statistical grouping of firms
developed over time within the industry. Accordingly, we
select our representative ratios, so that each one depicts
at least one or more unique factors or clusters (without
repeating the factor and cluster analysis).
The source of data for the study was Standard and Poor’s
Compustat tapes, which contain key financial statement
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
data for about 2,400 industrial firms for a time frame of
between 10 and 20 years. The industry used for analysis
was the oil-crude industry.
In contrast, the industry that we are using is the EE
industry. The inconsistency of the findings suggests that
abstraction of macro study findings to individual
industries and ratios may be inappropriate. Therefore, we
do not abstract macro study findings to individual
industries, we just use industry data and apply them to
companies. Likewise, we use the same sources of data. We
have adopted measures of profitability, liquidity, leverage,
turnover, and especially correlation analysis, for
congruence evaluation[3].
High R-square measures company and industry pattern
congruence
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The two most popular liquidity ratios are the current
ratio and the quick ratio. The current ratio is defined as
the ratio between the firm’s total current assets and its
current liabilities. The quick ratio separates the total
current assets into an inventory component and non-
inventory component, and divides the latter by the firm’s
current liabilities. Since we are not looking strictly at
liquidity, we do not use exactly the same ratios.
The firm’s liquidity ratios may deviate from those of the
average firm in the industry according to two factors: size
and labour intensity. The empirical findings show that
levels of both relative inventories and accounts receivable
were positive and significantly correlated with the labour
intensity variable. Relying on these findings when
evaluating liquidity ratios, the financial analyst can no
longer depend solely on the industry average to
determine the firm’s target level. We agree, and
implement this principle, by using only high R-square
(>90 per cent) companies, that clearly follow the average
firm pattern. When current assets are divided into 3
categories, cash enjoys clear economies of scale whereas
inventories and accounts receivable may be affected by
the state of the economy[4].
Forecasting firms’ performance according to industry
average ratios
The standard financial ratios accepted by the financial
community, when compared with a particular industrial
average, provide a valuable measure of performance.
While we are measuring performance, we are not
focusing on liquidity. Therefore, we apply only the
relevant findings of these practitioners’ study to the
present research. Using the current ratio (a ratio of
current assets to current liabilities) the analyst can judge
if the claims of short-term creditors are covered by assets.
The quick ratio (acid test ratio) removes inventory from
current assets since inventory is the least liquid among
current assets. The operating ratio measures a
corporation’s operating efficiency. It is calculated by
expressing the direct costs of producing sales as a
9
percentage of sales. This is exactly the way that we are
imputing the standard forecast company operation costs.
The return on sales ratio is a measure of net income to
sales and it is used to determine a corporation’s ability to
earn a profit on every dollar of sales. Return-on-
investment, the most frequently used, basically presents
the income earned for every dollar invested[5].
Industry-wide computer software development
standards search
Standards of software development and computer
information systems
Banks have not been quick to move towards open
systems because they have had to be extremely budget-
conscious and because few banking applications for Unix
exist. One obstacle to the open system is the existing
installed base of proprietary systems. Bank information
officers do not want to get rid of their existing hardware
and software just to conform to new industry standards.
More problematic is the issue of what exactly open
systems will be once they are implemented. Unix is still
the most likely candidate as the industry standard
operating system, but it suffers from not just a lack of
applications, but the inability of Unix vendors to agree on
one standard. Morgan Guaranty Trust Co., however, has
shown its faith in open systems by taking an active role in
their development and is the only bank that belongs to the
Corporation for Open Systems, a consortium of vendors
and corporate users. The international market is adding
momentum to the spread of open systems because
Europe is far ahead of North America in the technology’s
development. From such studies, we have adopted the
concepts of automation; systems development; standards;
many-companies; and the applications. We would like to
develop standard software for setting FSRA standards.
Even the most conservative industries, such as banking,
should benefit from these efforts[6].
Accounting information systems change manufacturing
performance
Digital Audio Disc Corp., a manufacturer of digital
compact discs, has made some changes designed to
reflect more closely the competitive environment. The
company’s experience highlights the need for accounting
and information systems to evolve in today’s highly
automated manufacturing environments. Likewise, we
also focus on manufacturing, where innovation and
automation has been promoted. The functions of a cost
management system include:
(1) providing information that identifies the resources
consumed in the performance of significant
activities;
(2) measuring the efficiency and effectiveness of these
activities; and
(3) identifying and evaluating new activities that can
improve the future performance of a firm.
 10 MANAGERIAL AUDITING JOURNAL 10,2
Poorly designed and outdated systems can distort the
realities of manufacturing performance. At Digital
Audio, production processes are being changed to
improve product flow. From such studies we adopt the
use of case studies; industry focus; automation;
information systems; cost accounting, company specific
versus entire EE (electronic and electrical) industries,
software and systems, applied to accounting policies and
procedures in the US[7].
Accountants search for standards in computer operating
systems
There is confusion in the microcomputer marketplace
revolving around the new operating system, OS/2, and
the introduction of new computer architectures, such as
the micro-channel architecture in IBM Corp’s PS/2 line of
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personal computers (PCs). Because the software decision
should outweigh the hardware decision, a PC’s
microprocessor is central to any purchase decision. Intel
Corp. has introduced three generations of micro-
processors used in IBM micros and clones. When
choosing a microprocessor, accountants need to consider
such issues as longevity, power needs, and marginal
benefits. For accountants who are certain that the less
power-demanding applications, such as word processing
and smaller spreadsheets, will be all they will require in
the next three to five years, the IBM XT and AT
compatibles are acceptable choices. Otherwise,
accountants should turn to the Intel 80386 micros to carry
them into the future.
This case study focuses on a single industry, the textile
industry; its changes; cost accounting; cost systems; cost
analysis; variance analysis; cost control; cost reduction;
production costs; process controls. Similarly, we deal with
these very issues applied to the EE industry, and the
APM company.
Industry standards for quality management, auditing
and cost control
Standards and deviation accounting for total quality
management (TQM)
Statistical quality control is a tool for establishing quality
standards and measuring deviations from these standards.
Cost variance analysis is an accounting technique which
measures the importance of deviations from production
standards in terms of firm-level objectives. A method is
introduced for determining the relative importance of
deviations from different food quality standards using cost
variance analysis. The method links quality control and
cost accounting first by defining quality standards based
on the firm’s profit maximization objective, and second by
measuring the importance of non-standard quality by its
effect on profit. Using a case-study involving the packaged
goods, the proposed method is compared to traditional cost
accounting techniques. Likewise, we are also using the
case-study approach, compared to traditional cost
accounting techniques, to highlight generic principles. The
model can be used by food manufacturers and processors
to measure quality cost variances when a lower quality
standard exists and quality can be reclaimed.
From such studies, we have adopted the focus on an EE
industry instead of the food processing industry. We also
use similar concepts of variance analysis; quality control;
comparative studies; cost accounting; and profit
maximization along with the contrast between the
experimental and the theoretical accounting policies and
procedures, using TQM[9].
Auditor’s analytical review apply industry standard to
companies
Audit for industry-wide minimum internal control
standards (MICS)
The experience of older gambling areas clearly
demonstrates the need for strict planning, rigorous
internal control, and careful auditing of gaming
operations. Gaming operations are subject to a greater
than normal risk of loss from employee and customer
dishonesty. Minimizing this risk requires the development
of procedures that can control the authorization,
accountability, and safekeeping of the gaming operation’s
major asset – cash. These procedures include paper
controls, physical safeguards, and human controls.
Nevada’s Gaming Control Board has established minimum
internal control standards (MICS). As part of the MICS, the
external auditor is required to make at least one
unannounced observation of each gaming area of slot
drop, table games drop, slot count, and table games count.
A MICS compliance questionnaire includes tests of the
effectiveness of controls for safeguarding revenues
generated by the slot department. Analytical review
procedures are important in testing casino revenues. They
could become important for applying industry averages to
auditing manufacturing companies, as in our EE and APM
case. From such studies, we adopted the concept of
legalized internal controls; using standards for fraud
auditing; as well as focusing on one industry at a time,
such as the entertainment industry[10].
Variance analysis and auditing minimizes insurance
industry fraud
Since every life insurance company is a treasury of cash
and requires tremendous volumes of data to be processed,
life companies are likely targets for fraud. Life carriers
should then implement a plan of action that would help
minimize its occurrence. The electronic data processing
equipment now common in corporate organizations
furthers the distance between upper management and
processed transactions and accentuates the need for built-
in controls. Fraud is most likely to occur where significant
amounts of cash are processed. Three functions
especially susceptible to fraud are premium processing,
claims processing, and policy loan administration. The
key to a good loan for minimizing fraud is to lessen the
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
opportunity for occurrence of undetected fraud.
Fraudulent acts should be detectable in normal insurance
business operations, but this will be possible only with a
designed system of internal controls. The first step in
their development is an evaluation of current operations
identifying procedures that minimize the possibility of
unauthorized transactions. Four basic general controls
include budget variance analysis performed monthly or
quarterly. Such variance should also compare company
performance to industry standards[11].
The insurance industry links fraud detection and internal
controls for auditing according to the Foreign Corrupt
Practices Act 1977-US. It provides guidelines; and
methods of comparing industry to company.
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Industry standards for cost planning, control and
investment
Activity-based costing (ABC) drivers and industry
standards
In activity-based costing (ABC), activities are considered
the true drivers of costs and thus are the basis for
allocating costs. Cal Electronic Circuits Inc. (CECI), a
manufacturer of printed circuit boards (PCB),
implemented an ABC system after careful planning and
analysis. The implementation process involved some
steps that resemble our study. Such steps include
preparing a spreadsheet correlating the processes and
potential drivers. We are correlating the company and the
industry and using an industry FSRA driver as a global
ABC company driver. Eventually, we would like to
reconcile the individual company, with industry wide ABC
drivers, confirming company policies. The soundness of
the cost driver standards at CECI is reviewed periodically,
likewise, we review the industry standards periodically.
Similarly, this study and our study both apply variance
analysis to indicate areas that require the attention of
external and internal auditors. From such case studies we
adopt principles of cost, management accounting; cost
allocation; process production planning and control[12].
Manage better by using flexible rather than static budgets
At a Hewlett-Packard Co. (HP) product-assembly facility, a
repetitive manufacturing system is used that incorporates
many just-in-time (JIT) purchasing and production
techniques and inventory reduction methods. As
repetitive processes are defined, production variances are
recognized more through manufacturing process control
methods and less through accounting systems. The HP
facility recognizes variances only at the point of purchase
and at production, and labour efficiency variances are no
longer calculated as labour hours are incurred. It was
found that many of the variances calculated at the plant
are over- or understated because of the use of only a static
overhead budget to analyse spending and volume
variances; and only a combination of direct labour and
overhead to analyse efficiency variances. It is suggested
11
that overhead costs and other conversion costs could be
better managed by the use of a flexible budget where
production overhead and direct labour costs are divided
into variable and fixed components. Likewise, we are
applying the variable component of industry standard
costs as a flexible budget[13].
We see that the HP deals with similar case studies;
focusing on the computer industry; just-in-time inventory
management; variance analysis; cost accounting;
accounting policies; promoting the management
accounting should expand the use of flexible budgeting,
and industry standards. Accordingly, we extend the
flexible budget concept even further by linking it to the
industry standards.
Industry standards for credit and investment decisions
Loan officers use unadjusted industry standard most of
the time
An experiment was conducted to investigate whether
loan officers, experienced in lending to the construction
industry, make adjustments to reported income based on
alternative methods of recognizing profit from long-term
construction contracts. The experiment used a within-
subjects design. Loan officers evaluated four cases with
the following variables: the method of recognizing long-
term construction revenue; and the expertise of
management. Two sets of financial statements providing
income statement, balance sheet, and notes for three
years were developed, with one recognizing revenue on a
completed contract basis and the other on a percentage of
completion basis. Two sets of management evaluation
also were used, with one set indicating experienced and
competent management, the other untried but probably
competent management. The results of the experiment
showed that most of the loan officers did not attempt to
adjust for alternative methods of recognizing revenue[14].
In the construction industry, accounting policies vary
concerning revenue recognition; accounting procedures
“percentage of completion method” may bias financial
statements of a company compared to the industry, in
accordance with AICPA statements of position; and
principles of variance analysis. Thus, we first screen a
company, and only if its R-square is high enough, we
apply industry standards. Otherwise, we need to adjust
the company and industry data, into one common
accounting methodology.
Models successfully adjust financial ratios for accounting
methods
Non-financial corporations in the US and the UK
currently can account for captive finance subsidiaries
under the equity method or through consolidation. The
choice of method will affect four common financial ratios:
(1) the current ratio;
(2) return on assets;
 12 MANAGERIAL AUDITING JOURNAL 10,2
(3) debt to equity; and
(4) receivable turnover.
The “financial distortion” argument is evaluated, and the
comparability of firms that use alternative reporting
practices is examined. Data were obtained on 51 firms in
the US general merchandising industry for 1981. Twenty-
one of the firms mentioned captive finance subsidiaries,
five of which reported on a consolidated basis and 15
using the equity method. After the 15 were restated on a
consolidated basis, ratios for these firms changed
significantly in relation to the ratios of the other firms.
Regression models are developed to relate differences in
underlying business conditions to differences in ratios
calculated under the two methods. The models are quite
successful in explaining many of the differences in the
turnover and debt-to-equity ratios[15].
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Financial statements treat subsidiaries differently;
financial reporting; balance sheets; and disclosure effects
can be adjusted; in the retailing industry within variance
analysis. This pattern applies to other industries, as we
have demonstrated.
Courts audit industry-wide variance analysis to regulate
adverts
In Michigan, the Attorney General recently challenged the
Michigan Liquor Control Commission’s authority to
prohibit truthful advertising for beer. The challenge
resulted in a period during which the commission lifted
the restriction on price advertising. A study was
undertaken to examine the effect of price advertising on
beer sales during the period when such advertising was
permitted. Information for the study came from A. C.
Nielsen in-store audits of 65 retail outlets in the state.
Sales of brewed beverages were subjected to variance
analysis for the periods before and after the price
advertising restrictions. The findings of the study suggest
that being able to advertise prices had no significant effect
on beer consumption. Thus, it appears that states have no
obvious reason to suppress completely the dissemination
of truthful information about price[16].
The alcohol and beverage industry evaluates pricing;
advertising; and impacts on consumption. They use
correlation (like our regression) analysis and studies to
regulate and support state court decisions. This
demonstrates another example, where industry-wide
standards can substantially enhance decisions that
eventually apply to individual companies.
Screen varied industry influence on company financial
structure
The importance of industry influence on capital structure
is ambiguous. The purpose here is to determine whether
industries have different financing patterns, whether
these patterns are widespread, and whether a few
industries account for the majority of the observed
differences. Two financial ratios – long-term debt to
equity and times-interest earned – were studied. The
three major findings are:
(1) Parametric analysis of mean industry leverage
ratios is inappropriate because the data do not
meet the distribution needs of such tests[2].
(2) All industries do not have the same financing
patterns, and these differences are statistically
important.
(3) Only a small percentage of the industries
examined were truly different in the way they
were financed[17].
Theoretically, the industry impacts on the financial
structure of a company. variance analysis shows that
applying economic theory may require distribution, and
statistical pattern screening and adjustments.
Industry, and market structure affect ratio information
contents
The unequal and costly access to relevant information
distinguishes competitive structures from the non-
competitive. The characteristics of accounting
information lead to the hypothesis that published
financial statements of firms in competitive industries
provide less information than those of firms in
oligopolistic industries. Empirical results of variance
analysis support the hypothesis with four main findings:
(1) Significant differences in ratios exist between
industries.
(2) Explicit consideration of the industry factor will
produce better forecasting, as in the case of
accounting profit.
(3) Inter-industry differences in accounting data can
be explained by the economic characteristics of
the industries, e.g. the degree of concentration.
(4) Significant information transfer by firms occurs
in an industry by way of released financial
statements.
The results suggest that accounting data possess
characteristics that differentiate them from one industry
to another – a view held by both users and analysts of
accounting information[18].
Therefore, we have to incorporate industry and market
structure in forecasting financial reporting, statements,
information, and disclosure; industrial concentration
also effects the informational contents of the financial
statements of a company.
Industry affects individual company standards case-
studies examples
Concrete industry standards affect firms’ cost systems
success
Cost control budgets and inventory valuation are crucial
in the manufacturing environment. The Concrete Pipe &
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
Products Company (CP&P) designed and implemented a
workable standard cost system and established inventory
valuation policies using the full absorption method of
inventory valuation. The most important phase in setting
the manufacturing budget is the production and sales
forecast. CP&P combines direct materials cost, direct
labour cost, and factory overhead cost to determine the
total standard cost. This summation is used by the sales
department for preparing sales quotations.
Two basic reports used extensively by CP&P are the
Weekly Labour and Production Report, and the Monthly
Expense Budget Report. Under the full absorption method
of inventory costing certain costs are required in
inventory valuation and certain other costs can be
excluded. Standards have been developed in CP&P to call
attention to cost variations and why costs are not what
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they should be. Extreme care is taken to ensure that all
factors have been considered in setting standards
because the success and acceptance of the standard cost
system depend on the reliability and accuracy of the
standards. Extensive use of the standard cost system
enables CP&P to control and reduce costs and simplify
costing procedures[19].
Cost control in manufacturing using sales forecasting
and budgets are effective in standard cost accounting; for
labour costs; raw materials; costs; overhead costs;
factories that use variance analysis, should incorporate
industry standards to ensure their reliability and
accuracy.
Adjusted average motor industry resembles individual
firms’ profits
The $3.5 billion profit realized by General Motors (GM) in
1978 has been labelled “excessive” and “unconscionable.”
An analysis of those profits is complicated by
measurement problems, inflation, and inter-firm risk
differences. Profitability analyses must take into account
differences between broad industry averages and
individual firm profits, and composite average earnings
of the motor vehicle industry were only moderately above
the all industry average from 1960-77. During the latter
half of this period, there was no significant difference
between motor vehicle and all manufacturing average
profits. Profit analysis must also allow for the effects of
risks and inflation on reported profits; both individual
firm earnings and cyclical industry profits are highly
variable in the automobile industry, and GM’s profits
during 1960-77 were less than predicted for the level of
risk in that industry. The analysis indicates that the $3.5
billion profit figure is neither excessive nor
stratospheric[20].
Excess profits in the automobile and motor vehicle
industry, along with profitability; profit margins; return
on investment; inflation; risk; affect variance analysis, of
individual firms such as, General Motors-Detroit. What
13
may be excessive for one industry may be inadequate for
another industry. Therefore, industry information is
imperative for standard evaluation and cost control.
Effective standards set-up on restaurant industry-wide
basis
Standard costing techniques can be effectively used for
cost accounting in the restaurant industry. Through the
development and success of the large chain restaurants, a
sophisticated industry has emerged. The entry of large
corporations into the field has also meant the
introduction of sophisticated accounting and
management systems. Reporting and control of
restaurant costs can be greatly improved through
application of standard costing. The industry must
initially decide on whether to apply standards to all costs
or to limit these procedures to only certain areas of
operations. Experience indicates that standard costs are
most effective when limited to food costs and even more
effective when limited to the cost of the entrée. Entrée cost
often approaches 80 per cent of total meal costs. Standard
costs application enables management to control overall
costs and aids in the menu pricing of meal offerings[21].
Industry or market share effect on sales forecast and
budgeting
The literature links industry or market share to sales
forecasting and budgeting. Hospitals have been the
forerunner in using industry standards. Decision makers
determine needs and commit capital based on a wide
range of criteria. Debt management, equity management,
leasing capital assets, and accounts receivable financings
are among the strategies and tactics available to
hospitals. Informally, they consider the impact of market
or industry share on the forecasts of the individual
hospitals. Yet they do not use it as a formal independent
variable[22].
Even though hedgers and investors have recognized the
influence of market or industry share on a firm’s forecast,
the accounting profession is slow to recognize it.
Treasurers of US firms are realizing that they need to
do more to manage their foreign exchange exposure
and to integrate that function better with overall
corporate planning. However, they are finding that
many of the more innovative and effective hedging
strategies are forbidden by obsolescent accounting
rules of the Financial Accounting Standards Board
(FASB). Even the FASB’s emerging-issues task force is
considering the legitimacy of various proposed
approaches[23].
Practitioners and academics have been forecasting sales
based on information that is internal or external to a
company. The problem is that these forecasts are always
off. Such forecasting errors have always posed a problem
leading to revisions and adjustments. One additional
facet that needs further investigation is the effect of
 14 MANAGERIAL AUDITING JOURNAL 10,2
aggregated industry on an individual company, purely on
the basis of accounting data. This study reviews current
attempts to link an entire industry to an individual
company and carries it one step further, in both a
theoretical and an empirical sense.
Industry forecasts of individual firms’ performance
One factor that is consistently overlooked is industry-wide
financial performance impact on this individual company.
The forecast usually results in errors. After the initial
forecasting process is complete, the revision starts[24].
Forecasters usually revise and adjust their forecasts on the
basis of new information. When managers make sales
forecasts they generate them by a “rational” quantitative
model. Therefore, when the managers discover the errors,
the focus is on revisions of the forecasts. It is important
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that the particular forecasts chosen for adjustment be
those that would benefit most from the adjustment
process.
The health-care industry investigates how effectively
managers revise their forecasts based on a market leader.
Likewise, this study investigates the impact of the
industry on sales forecasts of a market leader. The results
of the health-care study showed that the errors of the
forecasts chosen for revision are generally higher than are
those that were not chosen. In addition, managers tend to
revise forecasts that initially are low, thus possibly
introducing some degree of bias into the overall
forecasts[25].
One solution to such bias is using objective historical
industry-wide financial ratios. Such aggregated industry
criteria will reduce the negative effect of management bias.
Most forecasts use internal data and exclude industry-
wide data. This study predicates the forecast on external
industry-wide data, limiting internal data to the quarterly
sales of a company. Traditionally, analysts and
researchers have used industry-wide data to explain
forecasting errors and adjustment, but have not based
their forecasts primarily on industry-wide performance.
Venture capitalists have been using industry data
frequently. They would typically compare an individual
company to the industry in terms of their market share
and leadership position[26].
This leads us to suspect that industry-wide performance
can be a good predictor of individual company’s
performance. Although it has not been formally done, it is
a common topic of discussion.
Sale forecast as the cornerstone of the budgetary process
Rapid changes in the economic environment in the 1980s
have created a need for financial planning models (FPM)
to determine the effect of these changes on a company’s
financial health. A FPM starts with the sales forecast. To
determine the capital structure, the planner needs to
know the level of sales. Therefore, the model translates
the capital structure first into revenues, and from that
into fully-fledged budgeted financial statements. This
establishes sales forecasts as the cornerstone of the
broader budgeting process, for both the short and the
long terms[27].
Industry-based financial ratio supplements other ratios
The AICPA recognizes that practitioners need to consult
industry ratio comparison reports in the audit
programme preparation. This indicates that industry
ratios may affect the individual company, and thus should
be reviewed[28].
Calculated on a monthly basis, financial ratios have
become internal measurements by which a company and
its financial managers are evaluated. All too often,
however, both internal and external observers use the
wrong ratios to assess a company or fail to consider
changing circumstances. Some of these include ratios
related to: sales outstanding- a critical measure of a
company’s short-term financial health, and inventory
turnover. Industry-wide ratios may provide the missing
link to the incomplete set of currently used ratios[29].
Theoretical and empirical industry versus market
distinction
Researchers have already measured the relationship
between an individual company, the entire industry of
that company and the entire market. A variety of beta
values provide the most prominent comparisons of a
company to the entire market. The business has used a
beta measure to compare an individual firm to the entire
market. Beta measures the price volatility of a company’s
stock in relationship to the overall market.
A company’s stock price with a beta of 1.00 indicates that
any price fluctuations will be the same as the overall
market. The Media General Composite Index includes an
up market and down market for more than 660 industries,
allowing comparison between the beta of a company’s
stock and the industry beta (Popovich, 1991).
Accounting researchers have tried to apply these
“market” data concepts to accounting, but have failed
to distinguish clearly between two major issues. The
first issue is the distinction between the individual firm,
the industry and the entire market. The second issue is
the distinction between “market” and accounting data.
Theoretically, the firm-industry-market distinction
should be especially important in accounting, because of
the plethora of accounting choices and their substantial
and proven impact on the financial results. The above
studies distinguish between individual firm to industry
betas, and an industry-wide beta to the entire market
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
value. Therefore, researchers advise practitioners to
distinguish between an individual firm’s accounting data
and the aggregated industry accounting data[31].
Theoretical market versus accounting data distinction
The theoretical and empirical literature is replete with
examples of forecasting beta using accounting numbers
or at least explaining the behaviour of beta by accounting
choices. One common example evaluates the relationship
between systematic risk and accounting information
under the arbitrage pricing theory (APT). Researchers
investigated the usefulness of accounting data in
predicting APT factor risks, using 1973-82 financial
statements of 252 Standard & Poor’s firms. The results of
tests involving stepwise regressions and beta forecasts
suggest that APT-beta coefficient predictions based on
accounting variables outperform a set of forecasts based
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only on historical betas. Therefore, portfolio managers
can improve reliability by multivariate accounting
models. The leap from an individual company’s
accounting numbers to the market beta values may pose
some problems[32].
The first is the problem of mixing accounting numbers
and market numbers. The problem is that accounting
numbers of an individual company are much more
subjective and contain more anomalies than the
aggregated industry and market-wide numbers. The
choice of accounting policies effects beta values
differently. Therefore, it may be better to compare first
between the individual firm and the entire industry using
only accounting data. Only then, after offsetting some of
the accounting choices’ anomalies, use the aggregated
accounting numbers to enhance the forecasts of market
beta, instead of relying exclusively on an individual firm.
Aggregated accounting data should reduce some of these
anomalies and subjectivity and clearly segregating from
other factors and clearly identifying them. The
aggregated industry-wide accounting data should
enhance the individual firm’s data. Comparing industry-
wide aggregated accounting numbers may temper the
leap of comparing individual firm’s accounting numbers
with the entire market.
Theoretical inverse effect of industry on individual firms
Another problem is the secondary “backfire” effect of the
beta on the firm and its behaviour. Clearly the individual
firm’s behaviour affects its beta, as well as the aggregated
industry performance (by definition). However, what
about the company’s sales? Is it possible that the industry
average sales will affect the behaviour of the individual
firm’s sales? It is not clear that the movement of sales is
not analogous to the movement of the stock versus
market values. Yet most research focuses on the beta, but
not on the company’s sales. If such an effect indeed exists,
we can take advantage of it and improve our budgetary
forecasts, especially for prolonged time series. Some
15
studies show not only that the individual firms affect the
market, but also that the reverse may be true, the market
may in turn affect individual firms’ behaviour.
Some studies examine the theoretical relationship
between the firm’s operating risk and debt policy. These
studies demonstrate that an inverse relationship exists
between the operating risk and financial leverage in a
cross section of firms. These studies establish a
theoretical relationship between the firm’s risk
characteristics and financial structure, using the mean-
variance theory of security valuation. Linking the firm’s
decision (financial structure) and an ordinary risk
measure (common stock, beta) facilitates future empirical
tests[33].
Thus, the market can develop a life of its own and affects
the financial and operating leverage of the firm. Likewise,
an industry can develop a life of its own, and affect the
firms that operate in it. Therefore we take these findings
one step further and suggest that the financial and
operating leverage of the firm, can directly affect the
output of the firm and its sales. We propose to combine
this hypothesis with the notion that comparing between
the industry and a company is better than comparing the
entire market with a company. We also propose that using
consistent accounting numbers is better than mixing
market and accounting numbers.
Therefore, it seems the aggregated financial results of an
industry should explain a good part of the sales of
individual firms in this industry. Thus, the business
community could use aggregated industry financial
ratios to forecast individual firms’ sales, and compare
individual firms to industry-wide performance
standards.
Accounting data industry effect on a firm – the main
objective
The industry “market” data (beta) clearly affects the
individual firm. This study attempts to refine further the
inverse effect on company data by splitting it into 2 major
parts. The first part is the aggregated industry “market”
data effect on accounting data. The second part is the
aggregated industry accounting data on company data.
Likewise, if one wants to compare industry to company,
one should first compare them both purely on the basis of
accounting data. Only after focusing on the accounting
data and defining its effects, should one expand the model
to other types of data such as market data. The
accounting-based data comparison is the main objective
of this study.
Literature review – forecast of the EE industry
Despite fears and gloomy forecasts, US sales of data
communications networking services and equipment rose
by 8 per cent to $123.6 billion in 1990. While this growth
is considerably below the 15 per cent increases that the
 16 MANAGERIAL AUDITING JOURNAL 10,2
industry celebrated in the mid-1980s, it is still ahead of
the rest of the US economy[1].
Local area networks, specialized carriers, and
maintenance and professional services were the fastest
growing segments of the market. In 1991, service
revenues grew by slightly less than 10 per cent and
equipment sales, including computers, rose by 8 per cent.
Worldwide, the networking industry slightly outpaced
the domestic market in 1990, growing by 9 per cent over
1989 to $260 billion. However, with the slowdown in
computer sales in Europe and the economic uncertainty
and political unrest growing out of the Middle East
crisis, growth should be less than 9 per cent worldwide in
1992.
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More than ever, customers (who are demanding more
value-added services) squeeze margins between
component makers and electronic industrial distributors,
pushing for larger volumes of sales[2].
Analysts’ projections for 1992 are ranging from a 2 per
cent decrease to a highly optimistic 10 per cent increase in
growth. Distributors are positioning themselves for some
difficult times. Some major distributors are changing the
way they do business. They are shifting their focus from
simply trying to increase sales to taking a much closer
look at the profitability of the product lines they carry.
Distributors are looking for cost-effective ways of giving
manufacturers the technical representation they desire.
While the economy is undoubtedly slowing and will
continue to slow into 1992, Cahners expects the US
electronics production index to show no improvement
until mid-1990[3].
Electronics executives also foresee a slowdown but
expect it to be mild. Economists recommend to tighten
control and target foreign growth markets to handle the
slowdown. The long-term concern is economic stagnation
combined with inflation. Still, this economy protects the
electronics industry better than most other industries
from the market vagaries.
Data collection
This case study provides two data components. The first
component is industry data, and the second component is
company data. The sources of the industry data include:
US Department of Commerce, Bureau of the Census,
Quarterly Financial Reports (QFR) for manufacturing,
mining, and trade corporations, and several computer
databases such as PC-Compustat, Disclosure, and Invest-
Text. We averaged one industry’s financial statements
(income statement and balance sheet), according to its SIC
code. Then, we found companies from the same industry,
with the same SIC code (Appendix 5).
We collected the individual companies from the above
data bases. We have also reconciliated data from the
different databases, for consistency, and discarded
inconsistent data. For additional accuracy, we compared
the company data from the databases with the annual
financial reports that the companies mail and distribute
to investors. Therefore, we selected only public
companies, because their financial data are public,
accessible, and verifiable.
We have tried to select companies with one SIC code only,
so that the simple industry averages should represent
them well. Companies had to exist at least 20 quarters to
provide us with sufficient historical data to conduct
reliable time-series multiple trend regression analysis
(Appendix 1).
We have entered the companies’ data into the FSRA
program. This microcomputer software program
matches each company with an industry, computes,
revises, and graphs, its sales forecasting model, including
the R-Square and the predictor financial ratios (Figure 1).
Methods and procedures
Null and alternate hypothesis definition, testing and
rejection
This case study defines several linear trend regression
models, applies them to a sample company and industry
data. We then generalize from this sample of observations
to a larger population. This case study focuses on the
overall test of goodness-of-fit (coefficient of
determination). Thus, it defines the null hypothesis, H(o),
as R-square equal to zero, while the alternate hypothesis,
H(a), as R-square is not equal to zero. We are using the F-
test to reject the null hypothesis, at the 5 per cent
statistical confidence level. Accordingly, we have rejected
the null hypothesis for several of the above models.
Company sales forecast model based on industry FSRA –
the best fit
We have produced a financial statement ratio analysis
(FSRA) of the industry. This analysis includes the
following: year and quarter, industry share, operating
income margin, inventory turnover, debt ratio, return on
assets (Figure 1).
This table shows the company with the highest R-square.
This company was APM: Applied Magnetics Corp., with
an R-square of 0.950485. The F-static of 33.72414 is
highly significant at the 5 per cent statistical confidence
level. The 18 quarterly observations, less the 6
(independent, predictor) variables produce 12 degrees of
freedom. The X-coefficients of this model include:
0.877724 for year and quarter, 496,215.3 for industry
share, and –12,804.8 for operating income margin, etc. We
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 17

Figure 1. Financial statement ratio analysis (FSRA) sample screen forecasted sales budget model: a multiple trend regression
analysis

Variable Names: Year and Industry O-Income Inventory Debt Return

Raw data (top): Quarter Share Margin Turnover Ratio On Assets

Regression Output: Last-Run Com-1run Com-2run Com-3run Com-4run Corp.

Constant LASTOUT: 0 MXIM: MaAPM: Appl LAMP: So SONR: Sonar Radio
Corp
Std Err of Y Est 141.3919 650.1142 141.3919 203.6887 26.68983
R Squared 0.950485 0.987235 0.950485 0.947542 0.842934
Number of observations 18 18 18 18 18
Degrees of freedom 12 12 12 12 12
F-Stat=R**2(n–k–1)/(1–R**2)k 33.72414 >2.39=P(F(6,11)) = 90%
X Coefficient(s) 0.877724 496215.3 –12804.8 26339.55 –26015.3 –44725.26
Std Err of Coef. 3.416925 58368.54 9743.008 31182.91 189449.2 30285.157
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Std Err of Coef% 3.892936 0.117627 –0.76088 1.183881 `–7.28221 –0.677137

Transformed Data (bottom): 0 EXP(x) LN(EXP) LOG(EXP) (X-AVG)/STD
Std Err of Y Est 0.242145 0.141087 0.136058 0.341223 0.2421454
R Squared 0.852292 0.949855 0.953365 0.706688 0.8522920
Number of Observations 18 18 18 18 18
Degrees of Freedom 12 12 12 12 12
F-Stat=R**2(n–k–1)/(1–R**2)k 63.47128 > 2.39=P(F(6,11)) = 90%
X Coefficient(s) 0.157753 0.619366 0.047793 –2.18304 3.581621 –2.498265
Std Err of Coef. 0.037542 0.737347 0.581118 1.902633 2.310001 1.2637429
Std Err of Coef% 3.892936 0.117627 –0.76088 1.183881 –7.28221 –0.677137

X-coefficient(s) applied to financial ratios produce forecast sales $ budget

Year & Quarter = Using Julian or Serial date thus Sep-91=33,511 value
Industry Share = Company Net Sales/Industry Average Net Sales
Operating income margin = Industry Operating Income/Industry Net Sales
Inventory TurnOver = Industry COGS/Industry Inventory Average
Debt Ratio = Industry Total Liability/Industry Total Assets
Return On Assets = Industry Net Income/Industry Total Assets
F-stat = F statistic n = Number Of Observations R**2 = R-squared k = number of variables

TIC = Tickler Symbol, Company Name Abbreviation On The Stock Market Exchanges
TIC: FULL NAME OF COMPANY:* SOURCES OF DATA:
APM: Applied Magnetic Corp. CASE-STUDY Company Entered by User:
MXI: Maxim Integrated Product Corp. Sample Of Other High R-Square Companies:
SONR: Sonar Radio Corp.
*Companies like these (R**2>.9) follow closely industry pattern, and thus, can use this model. For other companies, we adjust the
model, to match more closely industries to company pattern.
Screen Prompt: Screen Help Information and Prompts Explanation:
Last-Run Last Regression Output Run Results APM: Applied Magnetics Corp.
Com-1run Computer 1st run, highest R-Square company MXIM: Maxim Integrated Product Corp.
Com-2,3,4run Computer 2nd ,3rd, 4th, run, 2nd, 3rd, and 4th highest R-SAPM: Applied Magnetics Corp.

Transformations: Description of data transformations & adjustments:

EXP(X) = Exponential data transformation
LN(EXP) = Natural Logarithm of Exponential Data Transformation
LOG(EXP) = Logarithmic Transformation Of Exponential Data Transformation
(X-AVG)/STD = Normalized (deduct mean and divide by standard deviation) Exponential Data Transformation
 18 MANAGERIAL AUDITING JOURNAL 10,2

will apply these coefficients to the industry FSRA variance analysis of company to industry financial
numbers (of the current quarter) to forecast the APM’s statements and FSRA.
company sales for the next quarter.
Company forecast sales budget by applying X-
The “regression-output” line of the table represents four
coefficients to the least financial ratios of the industry
computer runs, and a copy of the last run under the title
and company
“Last-run”. In this case the APM was the latest company
We applied the X-coefficients from the trend regression
tested. Thus, the contents of the top “Last-Run” and
model to the APM sales of the last quarter, to compute the
“Com-2run” are the same. The contents of the other
next quarter’s sales. Thus, we multiply the latest year and
columns, “Com-(1,3,&4)run” are somewhat different.
quarter by the value of its X-coefficient (Sep-
Each one represents another company within the EE
91=33,511*.87), the latest debt ratio, by the value of its X-
industry.
coefficient (0.56*–26,015.3). We then added the products
of the latest financial ratios and their respective X-
The bottom portion of the table, entitled “transformed
coefficients. This produced the forecast sales budget for
data” represents the transformed APM data regression
the company’s next quarter, $119,230.80. We have used
summary output. R-square remains high and highly
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the hold-out sample observation to test our model and

significant for the different companies as well as the
different transformations. Such consistent patterns of R-
squares may support the reliability of this model.
This trend regression analysis excluded the last quarter
of data for a hold-out sample. We will later use this hold-
out sample observation to test this model and forecast
next quarterly sales. We will eventually produce a
compute the forecasted sales budget (Figure 2).
Forecast cost by sales models: a univariate trend analysis
We constructed the forecast cost to sales models using a
univariate linear trend regression model. We regressed
each industry cost time series numbers (dependent,
predicted variable) on its corresponding industry net-

Figure 2. Financial statement ratio analysis (FSRA) sample forecast quarterly sales budget by applying FSRA trend regression, the
case of: APM: Applied Magnetic Corp.

COLUMNS: A B C=A*B D E= (2)

FSRA No. = Financial Stmnt Industry X Coeffi- X Coef. Std Err Std Err
Ratio Analysis Numbers FSRA No. cient(s) $ value of Coef.% of Coef.$
APM: Applied Magnetic Corp.
Year & Quarter (1) Sep-91 0.877724 29413.42 3.892936 Interval
Industry Share 0.214385 496215.3 106381.2 0.117627
Operating Income Margin –0.06908 –12804.8 884.6043 –0.76088
Inventory Turnover 0.346280 26339.55 9120.874 1.183881
Debt Ratio 0.564119 –26015.3 –14675.7 –7.28221
Return On Assets 0.265924 –44725.2 –11893.5 –0.67713

Forecasted Sales Budget (X-coef $ sum) 119230.8

(1) Using Julian or Serial date thus Sep-91=33,511 value
(2) Predictor variable coefficient (X-Coef.) Confidence interval in Dollar value can be computed for each predictor variable as:
B(i)+/–t(1-a/2,n–k–1)*S(y.12....k)*SQRT [C(ii)]
Where
B= X Coefficients, predictor variable coefficients
i = number of X Coef.
t = Student t-statistic with n-k-1 degrees of freedom
a = Statistical level of significance (i.e.: 5%, ……etc)
n = number of observations, periods of FSRA
k = number of variables X(i)+Y
S = Std Err of Coef. X
C = Gauss Multiplier
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
sales figures (independent, predictor variable). This
univariate trend regression produces an R-square, and an
X-coefficient for each cost item. Cost items with zero
values produce zeros for R-square, X-coefficient, and ERR
messages (Figure 3).
With 18 quarterly cost (dependent, predicted variable)
observations, and only one net sales (independent,
predictor) variable, this trend regression analysis has 17
degrees of freedom, leading to statistical significance.
Thus, the F-stat that exceeds the critical F-value of 3.03 is
statistically significant at the F(0.90, two-tail test) with a
5 per cent level of significance. For example, operating
cost has an R-square of 0.988763, with a significant F-stat
of 1407.89, and an X-coefficient of 0.90. This means that
operating costs (OC) should amount to 90 per cent of net-
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sales that explains 99 per cent of the changes (variation)
in the operating cost. Or, the correlation of the estimated
and the actual OC is about 99 per cent.
Note also that the zero-intercept model has consistently
higher R-squares compared with the constant-intercept
model. Thus, we first accept models with a significant F-
statistic. We then choose the model with the highest R-
square. We select most often the zero-intercept model,
because it has the highest R-square.
Imputing company standard costs by industry X-
coefficients: a match between company and industry
financial statements
We included schedules that impute company standard
costs by matching between company and industry
financial statement formats. Each schedule corresponds
to a different item from the income statement of a
company. Usually, most aggregated industry financial
statements (e.g., US Department of Commerce, Robert
Morris Associates Annual Statement Studies, The
Almanac Of Business and Industrial Ratios, by Leo Troy,
and Industry Norms and Key Business Ratios, by Dun &
Bradstreet) use a slightly different format compared to
the standards for individual companies (Figure 4,
Appendix 6).
We imputed the company cost of goods sold (COGS) by
the industry operating cost (OP_COST), together with
depreciation (DEPRE), and other company costs such as
selling, administrative, and R&D. In this case, we use
OP_COST X-coef of 90 per cent as a starting point, less
company selling & admin exp rate, 13 per cent, less
company R&D exp rate, 7 per cent, less estimated
industry depreciation rate, 3 per cent. This produces an
imputed company COGS rate standard of 66 per cent. We
apply this standard COGS rate to the forecast net-sales
budget, $119,231 to compute the budgeted COGS,
$78,670. Eventually, we compute the actual to the imputed
COGS variance. We then convert the dollar amount into
percentages (Schedule 1, within Figure 4).
19
We imputed the company provision for income tax by
adding the industry provisions for Tax Other Than
Federal Income Tax numbers. This sum equals the
imputed budget application rate for the provision for
income taxes (Schedule 2, within Figure 4).
Actual to imputed budget company variance analysis
based on industry FSRA and related trend regression
analyses
This table shows the percentage and dollar values of the
company quarterly income statement (QIS). It computes
the forecasted cost budget by adding the constant and
X-coefficient cost figures, and derives the dollar and
percentage variance amounts. It uses some of the imputed
costs computed in the supporting schedules, previously
discussed (Figure 5).
This variance analysis reveals some anomalies, that we
may not easily explain. For an extreme hypothetical
example, depreciation could be reported as zero. A
question that would follow is why does the company
report 0 depreciation? Does the company include it all in
the COGS account? Is it in accordance with generally
accepted accounting principles (GAAP). If indeed all the
depreciation is included in COGS, and it is in accordance
with GAAP, is it theoretically possible that a company
does not have any assets? Therefore, the company does
not have any depreciation related to selling,
administrative and other purposes. Is the company
understating its depreciation expense to overstate its
income, and entice investors? The answers to these
questions are not clear. This may raise important issues
for managers, auditors, investors, as well as analysts to
investigate further.
Interpreting charts, investigating and correcting variance
priority
Investigate variances based on size alone
We graph the differences of company and imputed
industry variances expressed in ratio percentages on the
vertical axis. These graphs include pie, bar, line, and
stack-bar charts. If we decide to investigate the variances
in descending order of their size, then the pie chart shows
the order of magnitude. The pie chart reveals that selling,
general and administrative expenses (SELL GEN &
ADMIN EXP) have the largest variance, 34.1 per cent,
therefore, we should investigate them first. For this same
reason, net sales (smallest variance, 1.9 per cent) should
be investigated last.
In this case, we can argue that negative and positive
variance investigation is equally important. For example,
a positive variance may disclose an extremely successful
employee. When the employee shares his or her
knowledge with the rest of the company, overall company
performance may improve. Likewise, a negative variance,
may reveal possible fraud. Detection and elimination of
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20
Forecasted Cost Budget ZERO INTERCEPT: * 6 (1) 7 8 9 10 11 12 (2) 13 (3) 14

OUT Regression Output: Lastout: NET_SALE DEPRE OP_COST OP–INC NONOP_INC NONOP_I EXPINCB4TAX NCONSUBIN FPCUDEFD TOPCUDEFDT
Constant 0 0 0 0 0 0 0 0 0 0
Std Err of Y Est 69.63347 69.63347 278.7395 295.8460 503.28732 0 654.2310 0 238.9305 0
R squared 0.305480 0.305480 0.988763 0.310515 –0.018755 ERR –0.03933 ERR –0.35805 ERR
No. of observations 18 18 18 18 18 18 18 18 18 18
Degrees of freedom 17 17 17 17 17 17 17 17 17 17
F-Stat=R*2(n–k–1)/(1–R** 27.037507>3.03=90% 7.037507 1407.890 7.205733 –0.294556 ERR –0.60547 ERR –4.21844 ERR
X Coefficient(s) 0.037080 0.037080 0.904061 0.058859 0.0049709 0 0.063828 0 0.019627 0
Std Err of Coef. 0.000300 0.000300 0.001201 0.001275 0.0021691 0 0.002819 0 0.001029 0
Std Err of Coef% 0.008093 0.008093 0.001328 0.021663 0.4363649 ERR 0.044176 ERR 0.052465 ERR
OUT 1 Regression Output: CONSTANT INTERCEPT
(X-Coef.) on sales: a univariate trend regression model

Constant 824.8449 824.8449 –226.725 –600.747 3185.9142 0 2583.348 0 3059.056 0

MANAGERIAL AUDITING JOURNAL 10,2

Std Err of Y Est 56.11079 0.56.11079 287.0546 303.2036 489.12259 0 659.6345 0 181.9347 0
R Squared 0.575563 0.575563 0.988783 0.318394 0.0943835 ERR 0.005581 ERR 0.258900 ERR
Number of Observations 18 18 18 18 18 18 18 18 18 18
Degrees of Freedom 16 16 16 16 16 16 16 16 16 16
F=Stat=R**2(n–k–1)/(1–R** 210.17050 > 2.39=90% 10.17050 661.1749 3.503431 0.7816517 ERR 0.042093 ERR 2.620102 ERR
X Coefficient(s) 0.022017 End\z: 0.022017 0.908201 0.069829 –0.053208 0 0.016652 0 –0.03623 0
Std Err of Coef. 0.004726 0.004726 0.024182 0.025542 0.0412048 0 0.055569 0 0.015326 0
Std Err of Coef% 0.214683 0.214683 0.026626 0.365783 –0.774397 ERR 3.337043 ERR –0.42297 ERR

*See detail definitions of these FSRA items in Appendix 4 and 6 (OP_COST=Operating Cost)
**‘Arithmetic Operation’–=Deduct, +=Add, *=Multiply, /=Divide, **=Exponent
ERR & 0 = Regression Predicted (Dependent) Variable output for Industry Data that equals zero (0)

(1) Industry OP_COST imputes Company Cost of Goods Sold (COGS) into Figure 4 (Schedule 1) and 4
7 OP_COST LESS: ALL OPERATING COSTS AND EXPENSES

(2) Industry FPCUDEFD imputes company PROV FOR INC TAX into Figure 3 (Schedule 2) and 4
13 FPCUDEFDTX LESS: PROVISION CUR AND DEFER DOMESTIC INC TAX-FED
Figure 3. Financial statement ratio analysis (FSRA) sample expenses (DEPRE, OP_COST, TAX, INTEREST…etc.) ratios

(3) Industry OPCUDEFD imputes company PROV FOR INC TAX into Figure 4 (Schedule 2) and 4
14 OPCUDEFDTX LESS: PROVISION CUR AND DEFER DOMESTIC INC TAX-OTHER
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 21

Figure 4. Financial statement ratio analysis (FSRA) sample imputed company standards by industry trend regression coefficients,
(Constant and X-Coef.), the case of: APM Applied Magnetic Corporation

Schedule 1
(1) COMPANY COST OF GOODS SOLD (COGS) IMPUTED BY TRENDS OF OP_COST AND COMPANY SELLING, ADMIN, R&D EXP,
DEPRE, …etc.

Row: FISCAL QUARTER ENDING 09/30/90

+1 Trend Regression Constant of Operating Costs (OP_COST) 0.00%

+2 Trend X-Coef Rate of Operating Cost (from Figure 3) 90.41%
–3 Company selling and admin exp rate (from Figure 5) –13.42%
–4 Company R&D exp rate (from Figure 5) –7.30%
+5 Estimated industry depre rate % (from Figure 5) –3.71%
+6 Other Unaccounted Exp Rates 0.00%
+7 Imputed Company COGS rate % Standard to apply 65.98%
+8 Forecasted sales budget (from Figure 2) $119,231
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9=7*8 $ Budgeted imputed of COGS (X–coef. portion) $78.666 (to Figure 5, COGS)
10=9+1 Total budgeted imputed company COGS (constant+X–coef.) $78,666 (to Figure 5, COGS)

Schedule 2
(2) COMPANY PROVISION FOR INCOME TAX IMPUTED BY INDUSTRY TAX PROVISIONS, TREND REGRESSION FOR FEDERAL A
AND OTHER DOMESTIC SOURCES, …etc,

Row: FISCAL QUARTER ENDING 09/30/90

+1 Trend regression constant for federal tax (Figure 3) 0

+2 Trend Coef for federal tax: (FPCUDEFDTX, from Figure 3) 1.96%
+3 Regression Constant for other than federal tax: (Figure 3) 0.00%
+4 Trend X-coef for other than Fed Tax (FOCUDEFDTX, Figure 3) 0.00%
+5 Other Foreign Tax Rate % 0
+6 Other Unaccounted Exp Rates 0
+7 Imputed Company Tax Provision rate % Standard to apply 1.96%
+8 Forecasted Sales Sales Budget $119,231
9=7*8 $ Budgeted Imputed Tax Exp (X–Coef. portion) $2,340 (to Figure 5, TAX)
10=9+1 Total Budgeted Imputed Company Tax Exp (Constant+X–Coef.) $2,340 (to Figure 5, TAX)
** Row number sign prefix shows it related:
Arithmetic operation –=Deduct, +–Add, *= Multiply, /=Divide

the fraud will also improve the overall performance of the
company.
Investigate variances based first on sign and second on
size
If we want to investigate the negative variances first (in
descending order of their size), and only then investigate
the positive variances, then the single bar chart reveals
the order of the analysis. We can argue that, negative
variances should have priority because of the indirect
negative publicity that they generate. This would be
above and beyond the direct impact on performance (i.e.,
improving performance by removing fraud).
This policy of order for investigating and correcting
variances leads to a different sequence. Thus, the single-
period bar-chart tells us to investigate the gross-profit
(largest negative variance) first, followed by the cost-of-
goods-sold (second largest negative variance). Again, we
should investigate selling, general & administrative
Expenses as our last priority, because it has the largest
positive variance.
Investigate variances based on trend, sign and only then
size
If we emphasize the long over the short term, we may
want to use the slope (steepness) of the variance change
overtime, as our primary criterion. We may argue that we
want to find the area where positive changes have been
implemented the fastest, to promote such improvements
company-wide.
The multi-period bar-chart with income-statement items
on the horizontal axis, shows the steepness of the slope of
each item over time. It depicts that the most accelerated
positive change occurs in the R&D areas. Therefore, if we
want to understand the key factors of implementing
positive changes, and promote them company- and
 22 MANAGERIAL AUDITING JOURNAL 10,2

Figure 5. Financial statement ratio analysis (FSRA) sample screen actual company to imputed industry percentage variance:
variance size, sign, and trend investigation and correction order of priorities, positive variance increases, negative decreases,
companies’ budgeted income ratios per cent differences of company versus industry, electronic and electrical equipment industry (EE),
standard industry classification (SIC) 36
COLUMNS:…
FISCAL A=B/$ales ** C=Regres D=Regres E=C+D*FNS F=E–B G=F/E G=F/E G=F/E G=F/E G=F/E G=F/E
QUARTER Actual Actual$ Constant X=coef. Forecas’d Variance Variance Variance Variance Variance Variance Variance
ENDING % * Costs Ratios Budget Difference In % In % In % In % In % In %

QUARTERLY
INCOME STA Sep-91 Sep-91 Sep-91 Sep-91 Sep-91 Sep-91 Sep-91 Jun-91 Mar-91 Dec-90 Sep-90 Jun-90
+ NET SALES 100.00 122,008 $0 100.00 $119,231 $2,777 2.33 –8.00 –15.00 –25.00 –37.00 –50.00
– (1) COST OF GOODS –74.94 (91,430) $0 –65.98 (78,666) $12,764 –16.23 5.00 15.00 20.00 33.00 39.00
= GROSS PROFIT 25.06 30,578 $0 34.02 40,565 ($9,987) –24.62 –12.00 16.00 25.00 39.00 42.00
– R & D EXPEN- –5.54 (6,754) $0 –7.54 (8,990) $2,236 24.87 –8.00 –12.40 –10.00 –25.00 –75.00
DITURES
– SELL GEN & –6.28 (7,658) $0 –11.00 (13,115) $5,457 41.61 –14.56 –18.87 –25.00 –35.00 –46.00
ADMIN EXP
= INC BEF DEP 13.25 16,166 $0 15.48 18,459 ($2,293) –12.42 –8.00 –2.00 25.00 35.00 55.00
AND AMORT
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– DEPRECIATION –1.69 (2,064) $0 –3.71 (4,421) $2,357 –53.32 0.00 0.00 0.00 0.00 0.00
AND AMORT
+ NON-OPERATING 0.49 600 $0 0.50 593 $7 1.23 0.17 13.67 12.50 15.78 23.88
INC
– (2) INTEREST –1.45 (1,765) $0 –2.00 (2,385) $620 –25.98 –0.04 0.16 29.00 38.00 44.00
= EXPENSE 10.60 12,937 $0 21.69 25,858 ($12,921) –49.97 0.00 –0.01 9.00 15.00 16.00
INCOME BEFORE TAX

– (3) PROV FOR INC –1.92 (2,342) $0 –1.96 (2,340) ($2) 0.08 –0.04 –56.16 –19.00 –23.00 –25.00
– TAXES –0.79 (967) $0 –5.00 (5,962) $4,995 –83.78 –50.00 59.68 –16.00 –25.00 –30.00
MINORITY INT (INC)
– (4) INVEST GAIN/ 0.00 0 $0 0.00 0 $0 0.00 0.00 0.00 0.00 0.00 0.00
LOSS
+ OTHER INCOME 0.00 0 $0 0.00 0 $0 0.00 0.00 0.00 0.00 0.00 0.00
= NET INC BEF EX 7.89 9,628 $0 28.65 34,160 ($24,532) –71.81 –54.00 75.19 13.00 23.00 45.00
ITEMS
– EX ITEMS AND 0.00 0 $0 0.00 0 $0 0.00 0.00 0.00 0.00 0.00 0.00
= NET INCOME 5.77 $7,044 $0 28.65 34,160 (27,116) –79.38 –55.00 –15.00 –5.00 –10.00 12.00

(1) See imputed COGS from industry Operating Costs in Figure 4 (schedule 1) and 2
(2) Impute Company Interest Expense from Industry NonOp–Cost in Figure 3
(3) Impute Co. Prov For Income Tax from Industry Federal in Figure 4 (Schedule 2) & 2 + Other Than Federal Tax in Figure 3 (Schedule 2) and 2
(4) Impute Company Investment Gains & Losses by Industry Extraordinary Gains (Net Of Taxes) less Industry Extraordinary Losses (Net)
* Some of the Actual figures have been modified for illustrative purposes & confidentiality
** Arithmetic Operation – = Deduct, + =Add, * = Multiply, / = Divide, ** = Exponent

industry-wide, we should first investigate the R&D areas
of this company.
Investigate period with largest departure from industry
standards
A more holistic view will focus the investigation on the
quarter with the turning-point in the trend of the departure
from the industry, rather than any particular income
statement item.
The multi-period bar-charts show us the trend of changes
in the variances over time. The multi-period bar-chart, with
the quarters on the horizontal axis, shows a hyperbolic
trend. The company’s departure from industry standard
reaches its lowest (on both the negative and positive sides)
point during Jun-91. During the last quarter, the departure
from industry standards reaches a turning point and starts
to rise again. If our objective is to minimize the negative
departure from industry standards, we may want to focus
on this turning point, and investigate it most thoroughly.
The line-chart and the stack-chart, both confirming the
departure (of the company from the industry) converge
during the quarter of Jun-91, and diverge during Sep-91.
We may want to investigate the convergence point to
evaluate the causes of negative and positive departures
from the industry standards. To quantify further this
approach, we are planning to increase the number of
periods, and compute the regression coefficients, leading
to a more comparative trend figure and a more refined
ranking of investigation priorities.
Further financial statement analysis, possible
traps and questions regarding significant
variance surprises
Additional FSRA ratios for broader analysis
There is an infinite number of FSRA combinations. We
have certainly not used all of them. One direction of
further analysis will be to test alternative ratios. It is
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA
possible that other ratios will reveal the answers to some
of these questions. So far we have used only one
company-specific ratio (market share), to identify clearly
the power of industry FSRA. It is very likely that
additional company specific ratios and time-series can
clarify many of the answers to some of these questions.
Additional periods and lags for pattern recognition and
clarity
This case study applies analysis of variance to only one
quarter with a single quarter lag. This single quarterly
variance can easily be an error, or a random occurrence.
A single quarter may not adequately represent other
quarters. Therefore, we will extend this analysis to
several consecutive quarters. We can repeat the same
analysis of variance for additional quarters. Such time-
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series analyses of variance would surely highlight
patterns much better than a single quarter. It may also
indicate a trend line, even more important for remedial
action, than the mere existence of a problem. Likewise, we
could use a larger number of observations to increase
further the statistical significance, as well as lag more
than one quarter to forecast two or three quarters ahead.
Extended industry and company information sources
reconciliation
Inconsistency among sources of aggregated industry
data, and inadequately detailed industry disclosure
standards may cloud these variances. Further analysis of
this may lead to a structure consistency and reliability
tests of the high variance related data. For example, if this
firm is using accelerated depreciation, and the rest of the
industry is using straight-line depreciation, the
depreciation variance may be significantly affected. The
same formula may be computed in different ways by
different sources. For example, Robert Morris computes
industry ratios before tax, while Dun and Bradstreet use
the after-tax numbers. The industry, as a whole, may be
changing inventory methods that will appear to be an
increase in net income.
More refined industry and company classification
schemes
The 2-3 SIC code grouping of the industry is a very gross
classification criterion. We could easily refine it by using
more SIC code digits. We could supplement the four digit
SIC numbers, by Fortune, Forbes, Cusip, as well as D-U-N-S
numbers. Likewise, we can create weighted averages of
several industries to match the make-up of individual
companies that do not fall in the centre of a single SIC code.
Furthermore, we could subclassify industries by asset-
size, geographical areas, individuals (auditors, managers,
brokers, directors, owners and insiders’ opinions or
reports). We could stratify based on capital structures,
fiscal year endings, market behaviours (volume, highs,
23
lows, close, price, and dividend rates ranges). We could
subdivide the industry by dates (ex-dividend, record,
payable, and last trade dates), analysts and rating
agencies’ views (earning estimates and liquidity ratings).
Much like financial classification, we could also classify
companies by operational criteria such as raw material
sources, production processes, as well as marketing
criteria such as end-product consumer perceptions.
Statistical, mathematical and sampling enhancements
Additional statistics can further enhance this analysis. For
example, we can compute confidence intervals around the
X-coefficient and the Y-estimates, to evaluate the statistical
significance of the variance. This may help to decide
whether a variance is material or not. We could use the
standard error of the X-coefficient that was computed. This
may help account for other errors from treatment of
missing data, measurement errors, sampling errors, and
correlated variables assumed incorrectly to be independent.
We can calculate the statistical distribution of various
ratios, compare their distribution to the assumed normal
distribution, and appropriately adjust it. Instead, we have
assumed that the ratios are normally distributed, because
they are aggregated industry averages (more likely to
distribute normally, compared with the distributions of
individual firms)
Step-wise, non-linear trend regression may further enhance
the results, using also R-square contributions, adjustments
and T-statistics of individual predictor variables (X-
coefficient). Moreover, we plan to apply more sophisticated
time-series analysis using Box-Jenkins and other
smoothing methodologies, computing auto-correlations,
Durbin-Watson, and other statistics. Likewise, we can
construct company, industry, economy, and value weighted
indexes. We also plan to compute their first and second
differenced operators across time-series, leading to a more
robust generic mathematical model.
Furthermore, in this case we performed only time-series
analysis, while cross-section industry as well as company
analysis could possibly be very complementary. Cross-
sectional factor analysis, and trend regression analysis can
tell us about commonalities of supply, demand, line-of-
business reporting, acquisition, divestitures, organizational
structures, and competition.
We can apply more sophisticated sampling techniques to
the selection of sample companies and industries, based on
a more refined scheme of industry codes, and other possible
improvements. Such techniques include stratified, random,
or dollar value sampling.
Summary, conclusions and implications
In summary, this case study develops a FSRA of variance,
based on a comparison between actual company to
 24 MANAGERIAL AUDITING JOURNAL 10,2
industry imputed forecast budgetary figures. It includes a
small sample of industry and company financial ratios, and
statistical analysis. We demonstrate the use of a
microcomputer-based FSRA. This case further developed
the concept of traditional accounting variance analysis, and
quality control, by adding new imputed forecast industry-
based standards. In addition, it rejected the null hypothesis
stating the R-squares of the net-sales and cost model equal
zero.
This case study concludes that such analysis can be quite
useful, statistically significant, and intuitively appealing. It
is only the tip of an iceberg of FSRA. The concept of
imputed industrial standard cost can complement the more
traditional concepts of cost standards. Examples include
current, attainable, theoretical standards for various items
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(such as direct materials, labour, and overheads), as well as
the statistical quality control, and deviations. We also
conclude that the models can be generalized to the
population of similar combination of company and
industry, and FSRA. However, while this new concept may
have some merit, additional improvements can greatly
enhance the effectiveness of such case studies.
This case study implies that for a high level of total quality
of FSRA industry information can be rather important. It
also stresses that such FSRA provides only an exploratory
view, of applying imputed industry forecast ratio standards
to individual company FSRA. We can enhance them with
additional improvements.
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“Annual report on American industry: aerospace and
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O’Brien, L., “Will the fax boom go bust?” Telephony, Vol. 217
No. 14, 25 September, 1989, pp. 38-48.
Rayner, B.P., Whiting, R., Knowles, A. and Leibowitz, M.R.,
“Midyear outlook – stagflation, here we come: US growth
slows into 1990”, Electronic Business, Vol. 15
No. 13, 26 June, 1989, pp. 54-95.

Appendix 1. Financial statement ratio analysis (FSRA) sample screen sample companies quarterly sales screen from the EE
industry
User entered companies sales time series Default sales:
SAMPLE USER COMPANIES STORED IN KOMPANY0/1.WK1 FILES
Fiscal Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 1 Company 2
Report Sales in Sales in Sales in Sales in Sales in Sales in Sales in Sales in
Quarter $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Mar-87 MXIM: MaAPM: Appl LAMP: So SONR: So MDK: Med TCDN: Te IBM: InteSony Corp
Jun-87 $3,044 $52,421 $778 $315 $4,112 $2,841 $10,000 $20,000
Sep-87 $3,774 $58,113 $697 $287 $4,398 $3,018 $10,100 $20,100
Dec-87 $4,079 $64,589 $790 $271 $4,872 $3,567 $10,200 $20,200
Mar-88 $5,079 $60,601 $580 $292 $5,436 $3,920 $10,300 $20,300
Jun-88 $6,078 $67,418 $775 $273 $5,363 $4,149 $10,400 $20,400
Sep-88 $6,531 $77,788 $717 $187 $4,565 $3,375 $10,500 $20,500
Dec-88 $7,234 $87,217 $995 $261 $5,467 $4,165 $10,600 $20,600
Mar-89 $8,429 $83,294 $1,102 $242 $4,732 $3,470 $10,700 $20,700
Jun-89 $9,501 $75,964 $1,389 $195 $5,753 $4,422 $10,800 $20,800
Sep-89 $10,300 $74,027 $1,466 $203 $5,776 $4,513 $10,900 $20,900
Dec-89 $10,581 $80,820 $1,602 $206 $6,515 $5,288 $11,000 $21,000
Mar-90 $11,681 $79,555 $1,741 $181 $5,894 $5,471 $11,100 $21,100
Jun-90 $12,251 $88,284 $1,652 $174 $5,308 $4,853 $11,200 $21,200
Sep-90 $13,157 $94,996 $1,848 $147 $4,164 $3,767 $11,300 $21,300
Dec-90 $14,423 $105,514 $2,194 $193 $4,494 $4,033 $11,400 $21,400
Mar-91 $16,129 $115,240 $2,335 $158 $5,431 $4,847 $11,500 $21,500
Jun-91 $17,317 $118,000 $2,210 $124 $4,817 $4,137 $11,600 $21,600
Sep-91 $18,045 $120,000 $2,303 $117 $4,519 $3,814 $11,700 $21,700
Dec-91 $18,822 $122,000 $2,379 $136 $5,816 $3,619 $11,800 $21,800

After users enter the companies’ quarterly sales, overwriting this default companies (IBM & SC), the FSRA program regresses these sales
against the industry ratios, (independent predictor variables), producing an R-Square (Figure 1). Companies with high R-Squares (>90%),
provide for a good fit forecasting model, using unadjusted industry data. For other companies, the industry data may have to be adjusted
to account for company to industry differences.
 26 MANAGERIAL AUDITING JOURNAL 10,2

Sample of initial ONE-INDUSTRY default companies screen shows expected data input format. (Company sales 1st digit matches the
company number to detect missing data.)

User Entered Companies: Default Sample Company:

MXIM: Maxim Integrated Product Corp. IBM: International Business Machines Corp.
APM: Applied Magnetic Corp. Sony Corp.
LAMP: Soi Industries Inc.
SONR: Sonar Radio Corp.
MDK: Medicore Inc.
TCDN: Techdyne Inc.

Appendix 2. Financial statement ratio analysis (FSRA) sample screen data used to compute company sales trend forecasting model
A&Y Y X B C D E F
Sales %% In $1,000 Operating Return
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

Corp’s Sales of: Year & Industry Income Inventory Debt On Assets
name: APM: Appl Quarter Share Margin turnOver Ratio ROA
0.52421 $52,421 Mar-87 0.106676 0.657603 0.350653 0.517599 0.2647157
0.58113 $58,113 Jun-87 0.112308 0.419186 0.462138 0.519491 0.2913306
0.64589 $64,589 Sep-87 0.121152 0.317901 0.475984 0.523070 0.2365784
0.60601 $60,601 Dec-87 0.106929 0.012141 0.387840 0.535445 0.2250681
0.67418 $67,418 Mar-88 0.128586 0.235735 0.432047 0.528819 0.2607049
0.77788 $77,788 Jun-88 0.140467 0.511357 0.497498 0.525315 0.2810523
0.87217 $87,217 Sep-88 0.152376 0.380880 0.482201 0.533191 0.2354606
0.83294 $83,294 Dec-88 0.135366 0.145915 0.395190 0.541107 0.3421652
0.75964 $75,964 Mar-89 0.142129 0.137512 0.385841 0.557942 0.3451209
0.74027 $74,027 Jun-89 0.131234 0.014097 0.461685 0.557710 0.2805810
0.8082 $80,820 Sep-89 0.149420 0.119619 0.367394 0.554645 0.2790982
0.79555 $79,555 Dec-89 0.138104 0.128254 0.396768 0.557794 0.2077719
0.88284 $88,284 Mar-90 0.169904 0.047934 0.335823 0.569086 0.1752883
0.94996 $94,996 Jun-90 0.174837 –0.00243 0.364579 0.576376 0.1793181
1.05514 $105,514 Sep-90 0.197984 –0.01594 0.362068 0.572287 0.1768573
1.1524 $115,240 Dec-90 0.203209 –0.40928 0.282276 0.567133 0.2751500
1.18 $118,000 Mar-91 0.227680 –0.08078 0.299108 0.569226 0.2685504
1.2 $120,000 Jun-91 0.214385 –0.06908 0.346280 0.564119 0.2659243
1.22 $122,000 Sep-91

Year and Quarter = using Julian or Serial date thus Sep-91 = 33,511 value
Industry Share = Company Net Sales/Industry Average Net Sales
Operating Income Margin = Industry Operating Income/Industry Net Sales
Inventory Turnover = Industry COGS/Industry Inventory Average
Debt Ratio = Industry Total Liability/Industry Total Assets
Return On Investment = Industry Net Income/Industry Total Assets

A and Y Predicted Dependent Company Sales Dividend by 10,000.

Y Predicted Dependent Company Raw Quarterly Reported Sales in US $
X, B-F Predictor Independent FSRA Variables.
APM: Applied Magnetic Corp.
After users enter the companies’ quarterly sales (dependent variable), APM: Applied Magnetic Corp. and picks the appropriate industry
(i.e.: EE), the FSRA software computes the independent (predictor variables X, B-F) ratios, producing the Sales and expenses forecasting
models in Figures 1 and 3.
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 27

Appendix 3. Industry data used to build company cost to sales forecast models:
NET_
ASS_ SALE OP_ OP_ NON NON INCB4 NCON FPCUD OPCUD INC
YR QTR SIC SIZE DEPRE COST INC OP_INC OP_EXP TAX SUBIN EFDT EFDT AFTAX
87 1 36. 11 49140 1986 44739 2416 1306 0 3722 0 1123 0 2599
87 2 36. 11 51744 1918 46806 3021 804 0 3825 0 1368 0 2457
87 3 36. 11 53312 1944 48068 3300 618 0 3918 0 1374 0 2544
87 4 36. 11 56674 2059 51738 2877 25 0 2902 0 932 0 1970
88 1 36. 11 52430 1998 47093 3338 471 0 3809 0 1075 0 2734
88 2 26. 11 55378 1981 49618 3779 1013 0 4791 0 1306 0 3485
88 3 36. 11 57238 1977 51441 3820 753 0 4573 0 1246 0 3327
88 4 36. 11 61532 2289 55694 3550 334 0 3884 0 507 0 3377
89 1 36. 11 53447 1978 48297 3172 272 0 3444 0 1080 0 2364
89 2 36. 11 56408 2128 50659 3621 30 0 3651 0 1155 0 2496
89 3 36. 11 54089 1998 49113 2977 239 0 3216 0 921 0 2295
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

89 4 36. 11 57605 2074 52315 3217 266 0 3483 0 974 0 2508

90 1 36. 11 51961 1961 46987 3012 94 0 3106 0 1053 0 2053
90 2 36. 11 54334 2057 49045 3232 –5 0 3226 0 1177 0 2050
90 3 36. 11 53294 2007 48032 3255 –32 0 3223 0 1190 0 2032
90 4 36. 11 56710 2067 51816 2827 –846 0 1982 0 931 0 1051
91 1 36. 11 51827 2030 46843 2954 –164 0 2789 0 916 0 1873
91 2 36. 11 55974 2041 50465 3468 –141 0 3327 0 1112 0 2215
Average 2027.388 49376.05 3213.111 279.83333 0 3492.833 0 1080 0 2412.777

Column Headers Numbers, Titles & Explanation

1 YR CALENDAR YEAR FINANCIAL DATA WERE GATHERED (’89, ’90, …, etc)

2 QTR CALENDAR QUARTER FINANCIAL DATA WERE GATHERED (1,2, …, etc)
3 SIC STANDARD INDUSTRIAL CLASSIFICATION (SIC) CODE (1-100)
4 ASS_SIZE TOTAL ASSET SIZE CODE (1-11, Asst<$5 Mill = 1, 5-10 = 2, 11 = Universal Totals, … etc)
5 NET_SALE NET SALES, RECEIPTS, & OPERATING REVENUES
6 DEPRE LESS: DEPREC, DEPLET & AMORT OF PROP, PLANT, EQUIP
7 OP_COST LESS: ALL OPERATING COSTS & EXPENSES
8 OP_INC INCOME OR LOSS FROM OPERATIONS
9 NONOP_INC NET NON-OP INC (DIVIDEND, INTEREST, RENT, ROYALTY)
10 NONOP_EXP NET NON-OPERATING EXPENSES (INTEREST, ETC.)
11 INCB4TAX INCOME (OR LOSS) BEFORE INCOME TAXES
12 NCONSUBINC NET INC. (OR LOSS) FROM NONCONSOLIDATED SUBSIDIARY
13 FPCUDEFDTX LESS: PROVISION CUR & DEFER DOMESTIC INC TAX – FED
14 OPCUDEFDTX LESS: PROVISION CUR & DEFER DOMESTIC INC TAX – OTHER

Appendix 4. Financial statement ratio analysis (FSRA) sample screen company financial statement analysis format cross
referenced to industry RSRA for reconciling, adjusting and imputing future trends

Company Industry

1 NET SALES 4
2 COST OF GOODS 7-6
3 GROSS PROFIT 7
4 R & D EXPENDITURES 8+9
5 SELL GEN & ADMIN EXP 10
6 INC BEF DEP & AMORT 7+Depreciation
7 DEPRECIATION & AMORT 6
8 NON-OPERATING INC 9
9 INTEREST EXPENSE 9
 28 MANAGERIAL AUDITING JOURNAL 10,2

10 INCOME BEFORE TAX 10

11 PROV FOR INC TAXES 12 Federal + 13 Others
12 MINORITY INT (INC) 17
13 INVEST GAINS/LOSSES 15 Gains + 16 Losses
14 OTHER INCOME 11
15 NET INC BEF EX ITEMS 14 – Income Tax
16 EX ITEMS & DISC OPS 15
17 NET INCOME 18
18 OUTSTANDING SHARES
19 CASH BALANCE SHEET
20 MRKTABLE SECURITIES
21 RECEIVABLES
22 INVENTORIES
23 RAW MATERIALS
24 WORK IN PROGRESS
25 FINISHED GOODS
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

26 NOTES RECEIVABLE
27 OTHER CURRENT ASSETS
28 TOTAL CURRENT ASSETS
29 PROP, PLANT & EQUIP
30 ACCUMULATED DEP
31 NET PROP & EQUIP
32 INVEST & ADV TO SUBS
33 OTHER NON-CUR ASSETS
34 DEFERRED CHARGES
35 INTANGIBLES
36 DEPOSITS & OTH ASSET
37 TOTAL ASSETS
38 NOTES PAYABLE QUARTERLY LIABILITIES (000$)
39 ACCOUNTS PAYABLE
40 CUR LONG TERM DEBT
41 CUR PORT CAP LEASES
42 ACCRUED EXPENSES
43 INCOME TAXES
44 OTHER CURRENT LIAB
45 TOTAL CURRENT LIAB
46 MORTGAGES
47 DEFERRED CHARGES/INC
48 CONVERTIBLE DEBT
49 LONG TERM DEBT
50 NON-CUR CAP LEASES
51 OTHER LONG TERM LIAB
52 TOTAL LIABILITIES
53 MINORITY INT (LIAB)
54 PREFERRED STOCK
55 COMMON STOCK NET
56 CAPITAL SURPLUS
57 RETAINED EARNIGS
58 TREASURY STOCK
59 OTHER LIABILITIES
60 SHAREHOLDER EQUITY
61 TOT LIAB & NET WORTH

Source: Disclosure Data Base

 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 29

Appendix 5. Financial statement ratio analysis (FSRA) sample screen

INFORMAL INDUSTRY FINANCIAL STATEMENT VARIABLES CROSS REFERENCED TO COMPANY

1 YR CALENDAR YEAR FINANCIAL DATA WERE GATHERED (89, 90, …, etc)

2 QTR CALENDAR QUARTER FINANCIAL DATA WERE GATHERED (1,2, …, etc)
3 SIC STANDARD INDUSTRIAL CLASSIFICATION (SIC) CODE (1-100)
4 ASS_SIZE TOTAL ASSET SIZE CODE (1-11, Asst<$5 Mill = 1, 5-10 = 2, … etc)
5 NET_SALE NET SALES, RECEIPTS & OPERATING REVENUES
6 DEPRE LESS: DEPREC, DEPLET & AMORT OF PROP, PLANT, EQUIP
7 OP_COST LESS: ALL OPERATING COSTS & EXPENSES
8 OP_INC INCOME OR LOSS FROM OPERATIONS
9 NONOP_INC NET NONOP INC (DIVIDEND, INTEREST, RENT, ROYALTY
10 NONOP_EXP NET NONOPERATING EXPENSES (INTEREST, ETC.)
11 INCB4TAX INCOME (OR LOSS) BEFORE INCOME TAXES
12 NCONSUBINC NET INC (OR LOSS) FROM NONCONSOLIDATED SUBSIDIARY
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

13 FPCUDEFDTX LESS: PROVISION CUR & DEFER DOMESTIC INC TAX – FED
14 OPCUDEFDTX LESS: PROVISION CUR & DEFER DOMESTIC INC TAX – OTHER
15 INCAFTAX INCOME (OR LOSS) AFTER INCOME TAXES
16 EXTORDGAIN EXTRAORDINARY GAINS (NET OF TAXES)
17 EXTORDLOSS LESS: EXTRAORDINARY LOSSES (NET OF TAXES)
18 MINSTKHINT LESS: MINORITY STOCKHOLDERS’ INTEREST
19 NET_INC NET INCOME (OR LOSS) FOR THE QTR
20 CASH_DIV CASH DIVIDEND CHARGED TO RET EARN IN CURRENT QTR
21 INC_RE NET INCOME RETAINED IN BUSINESS
22 BEG_RE RETAINED EARNINGS AT BEGINNING OF QTR
23 OTHR_RE OTHER DIRECT CREDITS OR (CHARGES) TO RET EARNINGS
24 END_RE RETAINED EARNINGS AT END OF QTR
25 CASHDD_US CASH & DEMAND DEPOSITS IN THE US
26 TMEDE_US TIME DEPOSITS IN THE US
27 DEP_OTHR DEPOSITS OUTSIDE THE US
28 TOT_CSH_ US TOTAL CASH ON HAND & IN BANKS
29 USTRESECSL US TREAS SECURITIES – SUBJ TO AGREEMENTS TO SELL
30 USTRESEC1Y US TREAS SECURITIES – OTHER, DUE IN 1 YR OR LESS
31 USTRE1MYR US TREAS SECURITIES – OTHER, DUE > 1 YR
32 FEDSECSELL FED AGENCY SECURITIES – SUBJ TO AGREEMENTS TO SELL
33 FEDSEC1YR FED AGENCY SECURITIES – OTHER, DUE IN 1 YR OR LESS
34 FEDSEC1MYR FED AGENCY SECURITIES – OTHER, DUE > 1 YR
35 COM_PAP_US US COMMERCIAL & FINANCE PAPER OF US ISSUERS
36 LGOVSEC1YR STATE & LOCAL GOV’T SECURITIES DUE 1 YR OR LESS
37 FOR_SEC1YR FOREIGN SECURITIES DUE IN 1 YEAR OR LESS
38 OSHRT_INVS OTHER SHORT-TERM FINANCIAL INVESTMENTS
39 TOTCAUSOTH TOTAL CASH, US GOVERNMENT & OTHER SECURITIES
40 TRADERECUS TRADE RECEIVABLES FROM US GOVERNMENT
41 TRD_AC_NOT TRADE ACCOUNTS & TRADE NOTES RECEIVABLE (NET)
42 TOT_RECEIV TOTAL RECEIVABLES
43 INVENTORY INVENTORIES
44 OT_CUR_ASS ALL OTHER CURRENT ASSETS
45 TOTCUR_ASS TOTAL CURRENT ASSETS
46 DEPR_FX_AS DEPRECIABLE & AMORTIZABLE FIXED ASSETS
47 LNDMIN_RTE LAND & MINERAL RIGHTS
48 LNDMIN_DPR LESS: ACCUM DEPREC, DEPLETION, & AMORTIZATION
49 NETPROPEQP NET PROPERTY, PLANT, & EQUIPMENT
50 O_NONCURAS ALL OTHER NONCURRENT ASSETS
51 TOT_ASSET TOTAL ASSETS
52 S_DEBT_BNK SHORT-TERM DEBT – BANKS (ORIG MATURITY 1 YR OR LESS)
 30 MANAGERIAL AUDITING JOURNAL 10,2

53 COM_PAPER COMMERCIAL PAPER

54 S_DEBT_OTH SHORT-TERM DEBT – OTHER (ORIG MATURITY 1 YR OR LESS)
55 ADVPRPAYUS ADVANCES & PREPAYMENTS OF US GOVERNMENT
56 TR_AC_NTPY TRADE ACCOUNTS & TRADE NOTES PAYABLE
57 ACINTAXFED INC TAX ACCRD, PRIOR & CUR YRS, NET PAYMNTS – FED
58 ACINTAXOTH INCT TAX ACCRD, PRIOR & CUR YRS, NET PAYMENTS – OTHER
59 CINSLTRMBK CURRENT INSTALMENTS ON LONG-TERM DEBT – BANKS
60 CINSLTRMOT CURRENT INSTALMENTS ON LONG-TERM DEBT – OTHER
61 OTHCURLIAB ALL OTHER CURRENT LIABILITIES
62 TOTCURLIAB TOTAL CURRENT LIABILITIES
63 LGTRDBTBNK LONG-TERM DEBT – BANKS
64 LGTRDBTOTH LONG-TERM DEBT – OTHER
65 NONCURLIAB ALL OTHER NONCURRENT LIABILITIES
66 MINSTHOINT MINORITY STOCKHOLDERS’ INTEREST
67 TOT_LIAB TOTAL LIABILITIES
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

68 CSTKOTHCAP CAPITAL STOCK & OTHER CAPITAL

69 RET_EARN RETAINED EARNINGS
70 TREA_STK LESS: TREASURY STOCK (AT COST)
71 STKHOLD_EQ STOCKHOLDERS’ EQUITY
72 TLIABSTHEQ TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
73 NETWRK_CAP NET WORKING CAPITAL
74 Releasenum Most recent Quarter (USER891=1981 1st Quarter)
75 sictitle SIC Industry Description (Drugs, or Iron Industry, … etc.)
76 Asset-size Asset Size in Millions of Dollars (Assets >$5 Mill, … etc.)
Source: US Census Bureau Quarter Financial Report (QFR)

Appendix 6. Financial statement ratio analysis (FSRA) sample screen FRSA sample screen for industry database financial trend
selection

SIC (STANDARD INDUSTRY CLASSIFICATION) CODE MENU (MENU_SCRN):

* = Un-done yet, ? = Under-development

M1 10-14 ALL MINING MA 35 MACHINERY

FK 20 FOOD & KINDRED INCLUD TOB EE 36 ELECTRICAL & ELECTRONIC EQPMNT
MI -20-39 ALL AMERICAN INDU TE 37 TRANSPORTATION EQUIPMENT
TM 22 TEXTILE MILL PRODUCTS MV 37.1 MOTOR VEHICLES & EQUIPMENT
ME *25 MACHINERY – EXCEPT ELECTRI AM ?37.7 AIRCRAFT- MISSILES & PARTS
PA 26 PAPER & ALLIED PRODUCTS IR 38 INSTRUMENTS & RELATED PRODUCTS
PP 27 PRINTING & PUBLISHING WD 50 WHOLESALE TRADE – DURABLE GOODS
CA 28 CHEMICALS & ALLIED PRODUCT WT -50 -51 ALL WHOLESALE TRADE
IA 28.1 INDSTRL CHEMICALS+SYNTHE WN 51 WHOLESALE TRADE – NONDURABLES
DR 28.3 DRUGS RM 53 RETAIL – GNRL MERCHANDISE STORES
PC *29 PETROLEUM & COAL PRODUCTS RT *-53- 59 ALL RETAIL TRADE
RP 30 RUBBER & MISC PLASTIC PROD RF 54 RETAIL – FOOD STORES
SC 32 STONE- CLAY- & GLASS PRODU RO 55 -59 RETAIL – ALL OTHER
PM 33 PRIMARY METAL INDUSTRIES NM 98 ALL NONDUR MNUFACTRNG INDSTRS
IS 33.1 -33.2 IRON & STEEL ON 98.1 OTHER NONDRBLE MNUFACTRNG <25M
NM 33.5 -33.6 NONFERROUS METALS AM 99 ALL DURABLE MNUFACTRNG INDSTRS
FM 34 FABRICATED METAL PRODUCTS OD 99.1 OTHER DURABLE MNUFACTRNG <25M
Last sic code selected: 36 0 To exit out of this menu

Users enter the SIC code of their companies, and FSRA applies industry data to the firms’ sales, producing sales & expenses
forecasting models.
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 31

Appendix 7. Financial statement ratio analysis (FSRA) sample screen formal & detailed industry financial statement analysis
format

Income Statement ($1,000,000) for the Standard Classification Code (SIC) of User Defined Synthetic Industry.
Assets $25 Million and Over

REVENUES
Net sales, Receipts, and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPENSES
Less: Depreciation, Depletion, and Amortization of Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: All other operating costs and expenses, including cost of goods sold, and selling, general, and administrative expenses . . . . . . .
Income (or loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-operating Income (dividend, interest, rent, royalties, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Non-operating expenses (interest, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes and extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

Net Income of foreign branches in equity and earnings of Domestic and foreign non consolidated entities and investments accounted
for the by the equity method, net of foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Provision for current and deferred domestic income taxes
a. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (or loss) after income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Extraordinary gains (net of taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Extraordinary losses (net of taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Minority stockholders’ interest in income (or loss) of consolidated operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (or loss) for quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends charged to retained earnings in current qtr
Net income retained in business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings at beginning of quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other direct credits (or charges) to retained earnings (net) including stock & other noncash dividends, etc. . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings at end of quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

End of Income Statement expressed in ($1,000.00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

User Defined Synthetic Industry
Assets $25 Million and Over

Retained Earning Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Add Net Income (Deduct Net loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Distributed Cash Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add Retained Earning Credits (Deduct Debits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained Earnings, Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Retained Earnings Statement (in $1,000.00) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet (In $1,000.00) for the Standard Classification Code (SIC) of User Defined Synthetic Industry
Assets $25 Million and Over

ASSETS
Current Assets:
Cash and demand deposits in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits in the US, including negotiable CDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits outside the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash on hand and in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
US Treasury securities:
(a) Subject to agreements to sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(b) Other, due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(c) Other, due in more than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 32 MANAGERIAL AUDITING JOURNAL 10,2

Federal agency securities:

(a) Subject to agreements to sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(c) Other, due in more than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and finance company paper of US issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local government securities due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign securities due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term financial investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, US Government and other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables from US Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other trade accounts and trade notes (less allowances for doubtful receivables) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciable and amortizable fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and mineral rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

Less: Accumulated depreciation, depletion & amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pg.1
06-Apr-92

All other noncurrent assets, including investment in non-consolidated entities, long-term investments, intangibles . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Short-term debt, original maturity of 1 year or less:
a. Loans from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Other short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advances and prepayments by US Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trade accounts and trade notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes accrued, prior and current yrs, net of payments:
a. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Instalments, due in 1 year or less, on long-term debt:
a. Loans from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other current liabilities, including excise and sales taxes, and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non current liabilities
Long-term debt (due in more than 1 year):
a. Loans from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other noncurrent liabilities, including deferred income taxes and capitalized leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority stockholders’ interest in consolidated domestic corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital stock and other capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End OF LIABILITIES AND STOCKHOLDERS’ EQUITY
 FORECASTING SALES, EXPENSES AND STOCK MARKET VALUES BY FSRA 33

NET WORKING CAPITAL: excess of total current assets over total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

End of Balance Sheet (In $1,000.00)

Income Statement (In % of Net Sales) for the (SIC) of User Defined Synthetic Industry
Assets $25 Million and Over

OPERATING RATIOS

INCOME STATEMENT IN RATIO FORMAT

Nett sales, receipts, and operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Depreciation, depletion, and amortization of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: All other operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (or loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net non-operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)

Income (or loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income of foreign branches and equity in earnings of nonconsolidated subsidiaries (net of foreign taxes) . . . . . . . . . . . . . . . . . . . . . .
Less: Provision for current and deferred domestic income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (or loss) after income taxes

End of Income Statement (In % of Net Sales)

Income Statement & Balance Sheet (In % Ratios) for the (SIC) of User Defined Synthetic Industry
Assets $25 Million and Over

OPERATING RATIOS

Annual rate of profit on stockholders equity period end:

Before incomes taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual rate of profit on total assets:
Before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Operating Ratios

Balance Sheet Ratios

Total current assets to total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash, US Government and other securities to total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity to total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Balance Sheet Ratios
End of Income Statement & Balance Sheet (In % Ratios)

Pg. 2
06-Apr-92

Avi Rushinek is a Professor in the Department of Accounting, and Sara F. Rushinek is a Professor in the Department of
Computer Information Systems, both at the University of Miami, Coral Gables, Florida, USA.
 This article has been cited by:

1. Woo Gon Kim, Baker Ayoun. 2005. Ratio Analysis for the Hospitality Industry: A Cross Sector Comparison of Financial
Trends in the Lodging, Restaurant, Airline, and Amusement Sectors. The Journal of Hospitality Financial Management 13,
59-78. [CrossRef]
Downloaded by University of Pittsburgh At 01:00 22 February 2016 (PT)