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STUDENT’S EDUCATIONAL PACKET

Entrepreneurship
Grade 12

2nd Quarter - Week Fifteen

Preparing, Analyzing, and Forecasting Financial Statements
OBJECTIVES: At the end of the lesson, the students must be able to:
1. identify terms in forecasting financial statements, and
2. forecast the revenues of the business.
INTRODUCTION:
Small businesses perform financial forecasting analyzing historical data and using it to
predict the company’s future financial performance. Preparing financial statement forecasts helps
small businesses plan their future growth and manage cash flow.
TASK 1:
Web Diagram
1. Complete the Web Diagram below. Think of terms that can be associated
with the word at the center. Write as many terms as possible.

Cash Flow
DISCUSSION:
Forecasting Financial Statements
 Income Statement Forecasting
There is usually a very close relationship between Sales and Cost of Sales
(or Cost of Goods Sold). Many Companies, in determining their selling
prices, conveniently add a specific percentage mark-up or margin to the
Cost of Sales, thus establishing a predictable ratio between the two items. If
an enterprise decides to slap a hundred percent mark-up on its Cost of
Sales, the Sales figure will double the Cost of Sales. As a percentage, Cost
of Sales will, therefore, be fifty percent of Sales.

Table 1: Forecasting Sales and Cost of Sales for XYZ (Php in Thousands)

Ye 2011 % 2012 % 2013 % 2014 % 2015 %

ar
Sale Forecast
Past Sales (Php 1,00 100. 1,100 100.0 1,200 100.0 100.0 100
100) 0.0 0 .0 .0 .0
Sales Forecast 1,331 1,464
(Php 000) .00 .00
Past Cost of Sales 700. 70.0 781.0 71.0 835.0 69.0
(Php) 0
Cost of Sales
Forecast
In Percentage 70.0 70.
Terms 0
In Peso Value (Php 932.0 1025.
000) 0
-The Sales Figures are converted to 100.0% over those three years to get a
common size picture. Next, the Cost of Sales is divided by the Sales figure
to get a percentage or ratio of Cost of Sales to Sales. After deriving the
percentage or ratios, one can make a fearless forecast of what the Cost of
Sales percentage will be in the coming years. The Sales Forecast for the
next two years can be set to approximate the growth trend of the last three
years. Since Sales grew by 10% from 2011 to 2012 and by 10% from
2012 to 2013, the financial forecaster can reasonably assume a sales
growth of 10% per annum in the next two years. The sales forecast for the
year 2014 is, thus, Php 1,331.00 and for the year 2015, the forecast can
be set at Php 1,464.00
-The forecast for the Cost of Sales percentage is 70% of sales for the years
2014 and 2015 as given in table 1. This percentage is merely an average of
the percentages for the last three years (2011 to 2013). One can
conceivably use the latest Cost of Sales percentage (2013) to reflect the
most current scenario. The next step is to apply the 70.0% percentage to
the Sales Forecast for the years 2014 and 2015 to get the Cost of Sales
peso value forecast for those two years.

 Balance Sheet Forecasting

Forecasting what the Balance Sheet of an enterprise will look like in the
future depends a lot on the future Sales. The Current Assets of the balance
Sheet include Cash, Marketable Securities, Accounts Receivables,
Inventories (Raw Materials, Work-in-Process, and Finished Goods), and
other current Assets.
Assets in the Balance Sheet must always equal liabilities and owners’
equity. However, in financial forecasting, most probably, the respective
totals of Assets and Liabilities plus Owners’ Equity will not be the same in
the initial attempt to construct a forecasted or Pro Forma Balance Sheet.

Table 2. Pro-Forma Balance Sheet As of Year Ending December 31, 2012

and December 31, 2013 (In Thousand Pesos)
Audit Foreca Assumption
ed sted Used
Balanc Balance
e Sheet Sheet as
as of of Dec.
Dec. 31, 2013
31,
20
12
ASSETS
Current
Assets Php Php Minimum cash
10,000 10,000 balance
Cash 30,000 45,000 30 days of Sales
(latest month)
Accounts 15,000 22,500 15 days of Sales
(ltest month)
Receiveable
Inventories
Total Current 55,000 77,500
Assets Gross 100,000 119,000 Additional
deptreciation
Fixed Assets computed
at Php 19,000
40,000 50,000 Additional
Accumulated deptreciation
computed
Depreciation at Php 10,000
Net Fixed 60,000 69,000
Assets 5,000 5,000 Assume same level
Other Assets as last year
Total Assets Php 151,000
120,000
LIABILITIES
Current
Liabilities
Accounts 15,000 22,500 Enterprise
Payable experience where
the level of Accounts
Payable
is roughly the same
as the
inventories level
Accrued 5,000 7,000 Same but additional
Expenses Taxes Payable
included.
Short Term 10,000 7,000 Balancing Figure to
Loans make
Liabilities equal to
Assets
Total Current 30,000 36,500
Liabilities
Long Term 50,000 69,000 Increased by Php
Loans 19,000 due to
additional Fixed
Asset acquisition
of Php 19,000
Stockholder's
Equity
Paid in Capital 30,000 30,000 Same level as last
year.
Retained 10,000 16,000 Additional Net profit
Earnings after Taxes
Total 40,000 46,000
Stockholder's
Equity
Total Liabilities Php
120,000
Php
151,500
and
Stockholders'
 Equity

-Table 2 provides an example of a Pro-Forma Balance Sheet with

explanatory notes on the side to indicate the assumptions used by the
forecaster.
-Since there would be additional long-term loan to finance the additional
Fixed Assets, interest expenses would go up. This means that the
forecaster would have to adjust the Pro-Forma Income Statement
previously made as shown in Table 3. Since the Net Income After Taxes
would go down from Php 6,000 to Php 5,400, there would be a need to
increase loans by Php 600 in order to balance the Balance Sheet.

Table 3. Pro-Forma Income Statement and Adjusted Pro-Forma Income

Statement for year 2013.

Inco Forma Comments

me Income
State Statem
ment ent
Sales Php Php
540,00 540,000
0
Cost of Good 340,00 340,000
Sold 0
Gross Profit 200,00 200,000
0
Operating 186,00 186,000
Expenses 0
Less Interest 6,000 6,800 Additional
Expenses Expenses of Php
800
Equals Net 8,000 7,200
Profit before
Taxes
Less Taxes 2,000 1,800 Taxes Decrease
by Php 200
Equals Net Php Php Net effect of Php
Profit after 6,000 5,400 600
Taxes

 Funds Flow Forecasting

To forecast the Funds Flow, the financial forecaster should compute
for the increase or decrease in the different items found in the Assets and
Liabilities columns, when comparing the actual or previous year’s Balance
Sheet and the Pro Forma Balance Sheet. Decreases in Assets and
increases in Liabilities are sources of funds, while increases in Assets and
Decreases in Liabilities are uses of funds.
Table 4. Cash Position Forecast using Sources and Uses of Funds

Beginning Cash
balance (as of Php 1,000
last Balance
Sheet)

300
600
Php 1,900
Add Source of
Funds 500
Increases in200
Liabilities
Accounts
Decreases in
Assets Accounts
Equals Cash
Avalaible
Subtract Uses
of Funds:
Decreases in
Liabilities Accounts
Increases in Assets
Accounts
Equals Net Cash 1,200
Position
-The Funds Forecast is also called the Cash Position Forecast as can be
seen in Table 4. Starting from the beginning cash balance, the forecaster
adds the Sources Funds to obtain Cash Available. From there, the Uses of
Funds are subtracted in order to obtain the Net Cash Position (Ending cash
Position)
Table 5. Adjusted cash Position Forecast

Beginning Cash
Balance Php
(as of last Balance 1,000
Sheet)
Add Source of
Funds: 300 ad 200
d
Increses in Liabilities 600
Accounts Decreases
in Assets Accounts
Equals cash Available Php 2,100
Subtract Uses of
Funds: 500 ad 200
d
Decreases in 200
Liabilities Accounts
Increases in Assets
Accounts
Equals Net Cash Php 1,200
Position
 -The Forecaster should adjust the reduction in the Net Fixed Assets
account caused by the increase in additional Accumulated Depreciation
form the previous year to the forecasted year.
-if one assumes that the Additional Accumulated Depreciation is Php 200,
then this means that the Depreciation Expenses for the year is also Php
200. Table
5. Reflects these adjustments. Other adjustments have to be made
because of the accrual method used.

 Cash Flow Forecasting

The entrepreneur or finance manager is concerned about the enterprise’s
survival on a day-to-day basis as well as its long-term sustainability. Cash
is a precious commodity that will make the enterprise live on and on. It is
crucial, therefore, to monitor and budget the enterprise’s cash position on a
daily, weekly, monthly, and yearly basis.

Table 6. ACME Enterprises Actual and Projected Income Statements (In Pesos)

Act Projected
ual for 2013
January to Jan Feb Mar Apr May Jun Jul
December 2012
Sales* 450,0 50,0 55,0 60,0 60,0 55,0 55,0 50,0
00 00 00 00 00 00 00 00
Cost of
Sales 130,0 15,0 16,5 18,0 18,0 16,5 16,5 15,0
00 00 00 00 00 00 00 00
Material 68,0 6,00 6,00 6,00 6,00 6,00 6,00 6,00
s Labor 00 0 0 0 0 0 0 0
Manufact 36,0 3,00 3,00 3,00 3,00 3,00 3,00 3,00
uring 00 0 0 0 0 0 0 0
36,0 3,00 3,00 3,00 3,00 3,00 3,00 3,00
Overhea 00 0 0 0 0 0 0 0
d 270,0 27,0 28,5 30,0 30,0 26,5 26,5 23,0
00 00 00 00 00 00 00 00
Deprecia
tion 180,0 23,0 26,5 30,0 30,0 26,5 26,5 23,0
00 00 00 00 00 00 00 00
Total Cost of
Sales 100,0 12,0 12,0 12,0 12,0 12,0 12,0 12,0
00 00 00 00 00 00 00 00
Gross
80,0 11,0 14,5 18,0 18,0 14,5 14,5 11,0
Profit 00 00 00 00 00 00 00 00
Selling 72,0 6,00 6,00 6,00 6,00 6,00 6,00 6,00
00 0 0 0 0 0 0 0
General 8,00 5,00 8,50 12,0 12,0 8,50 8,50 5,00
0 0 0 00 00 0 0 0
and 2,00 1,25 2,12 3,00 3,00 2,12 2,12 1,37
Administrativ 0 0 5 0 0 5 5 5
6,00 3,75 6,37 9,00 9,00 6,37 6,37 3,62
e 0 0 5 0 0 5 5 5
Expenses**
Operating
Profit
Interest
Expenses***
Net Profit
Before Taxes
Taxes***
Net Profit After
 Taxes

-Take the example of ACME Enterprises in Table 6. It has a policy and

actually experiences a 30-day sales collection period. It purchases the raw
materials and pays for the labor costs and outlays for overhead expenses
in cash one month before they recognized as Cost of sales. In other words,
ACME’s products must be produced one month bfore they get sold. Most
(80%) of the Selling, General, and Administrative (SGA) Expenses are paid
in cash during the operating month. However, 20% is paid one month later.
-Interest expenses on long term debt are paid on June 30 and December
31. The amortization of principal payments is also paid on the same dates.
Half of the taxes for the previous year’s income is paid on April 30 while the
other half is paid on July 31.
-Income Taxes are pegged at 25% of Net Income before Taxes. Beginning
Cash Balance as January 1, 2012 is Php 25,000.
 Using Financial Forecast to Evalute Business Investment Decisions The
Income and Cash payback period was introduced as a method to evaluate
business investments. The construction and forecasting of Financial
Statements would help the entrepreneur get a firmer grip on the viability of his
or her enterprise.
LET’S PRACTICE!
TASK 2: CASE STUDY
Read and understand the case carefully and answer the given questions
below.
Ricardo Cortez and Josie Hernandez were partners in a apparel factory in
Pampanga. They had 150 workers in the 2000s, who helped them manufacture
different designs of clothes, shoes, slippers, etc. which they displayed and sold by
the thousands in their store at the Clark Expo. They were considered very
successful at that time.
Their apparel business slowed down when either of them doesn’t know the
problem regarding on their financial information on how badly their company is
performing in terms of income management. Ricardo and Josie often quarreled
about it and to their different management styles. Ricardo had more
entrepreneurial characteristics: creative/innovative, flexible, updated on new
trends, and was willing to take risks. Josie belonged to the “old school” of
businessmen who could not understand Ricardo’s propositions regarding the
rehabilitation of their business:
getting business loans, introducing unique clothes designs, opening “tiangge”
stalls, online selling, etc. She was contented with the small profits they were
making.
Since their business is a partnership, Ricardo cannot carry out his plans
without Josie’s consent. Josie’s pessimism, for him, is unacceptable and he
foresees the closure of their business in a few more years if Josie will go on with
her way of thinking.

Who has the problem? What is their problem?

1.
 2.

3.

1. What do you think will happen to their business’ market condition in the
future?

TASK 3:
Use the following scenario to fill out the Monthly Cash Flow Statement
Worksheet.

You pay a You You pay You pay

receive rent of your
$150 Car your
monthly $450 per medical
payme nt gross month insurance
salary of of $75 a
$2,000 month

You pay You pay You pay for Your

your your car monthly monthly
renter's insurance of groce ries utilities are
insurance due. You
of $20 $150 $200 owe $125.
Your It's your taxes
you go to
monthly mother's come out
a movie
bill for birthday. of your
with a
gasoli ne You payche ck
frind that
comes in purchase Federal
cost $10
and you a $50 Tax $150
must pay present State tax
$75 $50
Social
security
$200
You put You hit a You go out You find the
$100 into pothole to dinner perfect
savings and have with outfit for
for a a flat friends. your date
Your bill is
vacation tire. You $25. this
must pay
ormation from the weekend.
at the $75 for aa You pay
new b$o1v0e0sfcoe
beach roknseheet with r nthaerioou. fit
Complete thisthe inf
 wo

Income
Gross Salary
Total
Income

Expenditures
Fixed
Expenses
Rent
Renter's Insurance
Automobile loan
payment
Automobile insurance
Medical Insurance
Revolving Savings fund
Federal Income tax
State income tax
Social Security tax
Total fixed
expenses

Variable Expenses
Food
Utilities
Gasoline and
maintenace
Clothing and personal
upkeep
Gifts
Miscellaneo
us
Total Variable
Expenses
Total
Expenses

SURPLUS
(DEFICIT)

Cash Flow Statement Worksheet Rubric:

The student did not follow directions. (minus 2)

The student created a cash flow statement that
was complete. The cash flow staement provided
detail of income and expenses (plus 10)

the student attempted to craete a cash flow

statement but they were not thorough. (plus 5)

The student did not attempt. (0 point)

 the student craeted a balance sheet that was
complete. Detailed infromation was provided for
assets and liabilities. (plus 10)

the student did not attempt. (0 point)

the assignment was late. (loss of one point per

day)

Total

TASK 4:
1. Observe your family financial expenses or monitor your family’s wealth on
this week. Identify one problem that you think you have in managing your
family expenses. Solve your identified problem by going through simple
steps in managing your family expenses. (Note: Minimum of 5 steps)

My Own Financial Literacy

PROBLEM:

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Step 8

2. What have you learned in giving steps in managing your own financial
expenses?
____________________________________________________________
____________________________________________________________
________________.
EVALUATION:

CORRECT THE SENTENCES: Identify the word that makes the sentence
incorrect and write down the correct one.
1. Market prices tend to be relatively high in a very competitive business.
2. After forecasting Sales and Cost of Sales, the Gross profit figures can be
derived by adding the Cost of Sales from Sales.
3. The financial forecaster can go through each Operating Expense item and
determine how it will behave in the future as Sales rise.
4. Once all the Operating Expenses are computed, they should be summed
up. The total is then added from the Gross Profit forecasted in order to
derive Operating Profit.
5. Once Current Liabilities must be individually looked up. Prepaid insurance,
for example, can be determined by examining how much premium will be
required to insure the company’s properties for the coming year.

COMPLETE THE SENTENCES: Choose the correct word or phrase from the box
to complete each sentence.
Enterprise Goodwill Fixed Assets

Entrepreneur Cash Balance Organizational Expenses

Patents Balance Sheet Depreciation Expenses

Marketable Securities

1. Whenever we talk about the , assets must always

equal liabilities and owner’s equity.
2. comprise feasibility studies, enterprise
promotion activities, pre-operating expenses, and other set-up costs.
3. is the premium paid by the enterprise for an asset or
share of stock whose book value is lower than the purchase or qcquisition
price.
4. are payments to holders of an invention or technology
5. Forecasting requires an assessment of the
enterprise’s future requirements for land, building, machinery, equipment,
furniture, fixtures, and other long lasting assets.
6. If the Cash goes below the minimum balance, the forecaster can cover the
cash shortfall by obtaining more loans or by liquidating
into cash.
7. Marketable Securities can be the repository of excess cash. It can be
drawn down or reduced if the falls below the minimum
required.
8. The may also decide to collect all of the
Advances and not give any more of such Advances to employees, in which
case the advances to Employees becomes zero for the next year.
9. The construction and forecasting of Financial Statements would help the
get a firmer grip on the viability of his or her enterprise.
10. To determine the , the forecaster has to refer to the
depreciation schedules calculated by the enterprise’s accountants for each
fixed asset.
SYNTHEZISE:
The financial forecast is an essential step when creating a business plan. The financial forecast
allows you to anticipate the revenues and expenses of your business over a given a period of
time. Even if the exercise sometimes delicate to carry out, it is nevertheless essential for any
entrepreneur. Indeed, it allows you to define quantified objectives, which, if meticulously tracked,
will allow you to grow your business in good conditions.

ASSIGNMENT:
Write down at least 2 key factors on the following terms:
1. Loss of the Business Operation
a. _____________________________
b. _____________________________
2. Business Profit
a. _____________________________
b. _____________________________

References: SHS DepEd Learning Module: Writer – A. Gutierrez -TII, Diosdado Macapagal HS