Forecasting

- Forecasting is a tool used for predicting future demand based on past demand information.

Why is forecasting important?

Demand for products and services is usually uncertain.
Forecasting can be used for…
• Strategic planning (long range planning)
• Finance and accounting (budgets and cost controls)
• Marketing (future sales, new products)
Production and operations

PLANNING
-is the process of establishing goals and identifying courses of action (strategies) to meet the
goals. Planning is like a road map; it helps point out the roads (or the alternative methods) to reach the
destination (or the goal). In finance, the goal of management is often stated as the maximization of the
value of the firm.
 Who Prepares Financial Statements?
• Public companies
• Private companies
• Government entities – federal, provincial, municipal
• Not-for-profit organizations
Users of Financial Statements
• Shareholders
• Creditors
• Canada Revenue Agency
• Competitors
• Other possible users:
Potential investors
Franchise owners
Employees
Regulators
Financial Statements
Financial statements include:
• Balance Sheet or Statement of Financial Position
• Income Statement and Statement of Comprehensive Income
• Statement of Changes in Equity or Statement of Retained Earnings
• Statement of Cash Flows
• Notes to the Financial Statements
General Purpose Financial Statements
General Purpose Financial Statements (GPFS)
• Intended for all users
• Prepared in accordance with GAAP:
Canadian GAAP, IFRS, Public Sector GAAP, etc.
• Prepared at least once per year
• Must be interpreted by user
• GPFS are intended for no one in particular and for
everyone in general

Materiality
Materiality is the significance of financial information to stakeholders.
▫ Information is material if its omission or misstatement affects the judgment of the
users of the financial statements
▫ Financial statements should be free of material misstatements or errors, and all
material information should be reported in the financial statements or notes
because its absence may affect decision making
▫ What information should be considered material?
 The Balance Sheet
Balance Sheet - Summary of an entity’s financial position at a point in time
• Also known as “Statement of Financial Position”
• Elements:
Assets (A)
Liabilities (L)
Owners’ Equity (OE)
Preliminary definition of the elements:
▫ Assets (A) are economic resources that provide future benefits to an entity
▫ Liabilities (L) are an entity’s obligations
▫ Owners’ equity (OE) is the investment the owners have made in the entity
Information about an entity’s financial position can help stakeholders:
▫ evaluate its financial health
▫ assess its risk
▫ predict its future cash flows

The Income Statement

Income Statement - measures an entity’s economic activity over a period of time, such as a
year
• A “How did we do?” statement

• Shows results for an accounting period (usually 1 yr.)

Unlike balance sheet (entity’s life)
Revenues - Expenses = Net Income (aka “Bottom line”).
• Uses for an income statement are:
Evaluating the performance of an entity and its management
Predicting future earnings and cash flows
Estimating the value of an entity
Determining the amount of tax that must be paid
Economic Consequences
• The income statement can have significant economic consequences for entities and
their stakeholders including:
Stock prices often change when a company announces its net income
Managers’ bonuses are often based on net income
Net income is used to determine income taxes
The selling price of a business can be based on net income

Income Statement – Format

ABC Company Ltd.
Income Statement
For Year End Dec. 31, 20xx
Revenue xxx
- Cost of Goods Sold (xxx)
= Gross Margin xxx
- Operating Expenses (xxx)
 = NI Before Income Taxes xxx
- Income Taxes (xxx)
= Net Income xxx

Statement of Comprehensive Income

• In the past, certain types of economic events were excluded from the calculation of net
income
•
• Many of these items went directly to owners’ equity or were not recorded
• Comprehensive income is an extension of
• net income
• Current GAAP attempts to capture all transactions and economic events that involve
non-owners and that affect equity
• This measure is called comprehensive income and is calculated as follows:
• Comprehensive Income =
• Net income + Other Comprehensive Income (OCI)
Other Comprehensive Income – includes transactions and economic events that involve non-
owners and affect equity but are excluded from the calculation of net income
Examples include:
• Foreign Currency Gains/Losses
• Unrealized Gains/Losses from Available for Sale Investments
• Pension Plan Gains/Losses
Comprehensive Income and the Balance Sheet
• Comprehensive income also affects the equity section of the balance sheet
• Other comprehensive income is treated the same way that retained earnings is handled
• In the equity section of the balance sheet, there is
an account called Accumulated Other
Comprehensive Income (AOCI)
(Note: ASPE does not include OCI or AOCI)

Statement of Changes in Equity

• Companies that follow IFRS must provide a statement of changes in equity
• This presents the changes in each account in the equity section of the balance sheet
during a period
Statement of Retained Earnings
• Accounting for Private Enterprises (ASPE) only requires a statement of retained
earnings, not a statement of changes in equity
• Summarizes changes during the period:
Opening retained earnings
(+) Plus, net income for period
(-) Less dividends declared
(=) Equals ending retained earnings
 Statement of Cash Flows
• Statement of Cash Flows – shows how an entity obtained and used cash during a period
Cash is crucial to survival and success of any entity
Entities need cash to meet obligations as they come due
Cash and Net Income aren’t the same thing because of accrual accounting
Statement of Cash Flows includes three types of
cash flows:
1) Cash from/used in operations
▫ Stated on an accrual basis
2) Cash from/used in financing activities
▫ From long-term liabilities and directly from investors
3) Cash from/used in investing activities
▫ Used to buy capital assets
Relationship Among Financial Statements
• The individual financial statements are closely related
• Many transactions and economic events involve both the Income Statement and the
Balance Sheet, and any transaction that involves cash is included in the Statement of
Cash Flows
• The “flow statements” capture the changes between two balance sheets:
• The statement of cash flows shows how the balance in the cash account on the
balance sheet changed from one year to the next
• 2) The statements of income and shareholders’
• equity provide information on changes in the
• equity section of the balance sheet from one
• year to the next

Notes to Financial Statements

• Notes to the financial statements:
Expand and explain the information in the statements
Explain the accounting policies
Provide additional information that may help stakeholders assess an entity

Format of Financial Statements

• Most financial statements follow accounting equation:
Assets = Liabilities + Owners’ equity
• However, accountants can prepare any type of report to satisfy the needs of
stakeholders
Special Purpose Reports
Accounting reports that are prepared to meet the needs of specific stakeholders
• Normally aren’t publicly available
• Don’t have to be prepared in accordance with any set of standards
 Forecasting
- Forecasting is a tool used for predicting future demand based on past demand information.

Why is forecasting important?

Demand for products and services is usually uncertain.
Forecasting can be used for…
• Strategic planning (long range planning)
• Finance and accounting (budgets and cost controls)
• Marketing (future sales, new products)
Production and operations

PLANNING
-is the process of establishing goals and identifying courses of action (strategies) to meet the
goals. Planning is like a road map; it helps point out the roads (or the alternative methods) to reach the
destination (or the goal). In finance, the goal of management is often stated as the maximization of the
value of the firm.