Senior High School

Entrepreneurship
Quarter 2 – Module 3:

Writer:
ARIEL G. GUTIERREZ
T-II Diosdado Mcapagal Memorial HS -
Floridablanca
Editors:
JANE P. VALENCIA, EdD – Math/ABM Supervisor
CHAIRMAN

`
 Preparing, Analyzing, and
Forecasting Financial Statements

1
 What I Need to Know

This module was designed and written with you in mind. It is here to help you
to explore forecasting financial statement for Entrepreneurship as a career. The scope
of this module permits it to be used in many different learning situations. The
language used recognizes the diverse vocabulary level of students. The lessons are
arranged to follow the standard sequence of the course. But the order in which you
read them can be changed to correspond with the textbook you are now using.

After going through this module, you are expected to:

1. Forecast the revenues of the business.

What I Know
ASSESSMENT 4

Hey there! Welcome to our lesson, how are you? I hope you’re doing good and
enjoyed the previous lesson we had. Just like the previous lesson, let’s have a pre-test
to check your prior knowledge about the topic. If you got a perfect score, you can skip
this lesson and proceed to the next module, but if you didn’t get a perfect score, you
don’t have to worry because this module will help and guide you to understand the
topic Are you ready? Let’s start.

I. Choose the letter of the best answer. Write the chosen letter on a separate sheet of
paper.
1. It is a separate legal personality created by law.
a. Partnership
b. Company
c. Corporation
d. Store
2. It summarizes what is going to happen to the business if plans are carried out
well.
a. Financial Statements
b. Income Statement
c. Financial Forecast
d. Outcome Source
3. Which the corporation would have to pay back in terms of principal payments
and in terms of interest expenses.
a. Goods
b. Products
c. Assets
d. Loans
4. The one that will concoct an account called depreciation.
a. Manager
b. Accountant
c. Contractor

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 d. None of the above
5. They are the finished goods when sold.
a. Cash flow
b. Contingency plans
c. Cost of goods sold
d. Products sold
6. These are the selling, general, and administrative expenses.
a. Period Costs
b. Annual income
c. Source of funds
d. Cost of goods sold
7. These are the funds going from one container or one circle to another container
or another circle comprise the funds flow except for the account called
depreciation.
a. Benchmarking
b. Funds flow
c. Scenario planning
d. Participatory planning
8. It is a situation when cash inflows are greater than the cash outflow.
a. Assets
b. Net cash outflow
c. Cash inflow
d. Container of funds
9. It is the basis for the entire construction of the financial statement.
a. Double entry accounting
b. Credits
c. Depreciated value
d. None of the above
10. These are the stockholder’s equity, short-term debt, long term debt, suppliers
credit, and accrued expenses.
a. Liabilities
b. Credits
c. Assets
d. Cash Flow
11. These are the accounts for cash, accounts receivable, inventory, fixed assets,
and other assets.
a. Income
b. Cash outflow
c. Container of funds
d. Cash inflow

12. It is the source of funds.

a. Cash
b. Liabilities
c. Salary
d. None of the above
13. It is the uses of funds
a. Paid liabilities
b. Purchased assets
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 c. Container flow
d. None of the above

14. These are abstractions of all the business transactions going on in an

enterprise.
a. Flow of assets
b. Income Statement
c. Financial Statement
d. None of the above
15. It is also called the profit and loss statement.
a. Debt
b. Income flow
c. Financial statement
d. Income Statement

Lesson

3 Forecasting Financial Statements

Hi! We are now in our module 4, how are you today? I hope you enjoyed the
discussion and activities in our module 3. Before we talk about the forecasting
financial statements for Entrepreneurship as a career, let’s have a simple activity first.

What’s In

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.

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 Cash Flow

Now that you already know the relevance of “cash flow” in our lives and its
importance in an entrepreneur, let’s have another question that you can answer to
foresee the lesson.

2. How do you determine your own wealth? And, how would you know if an item is
an asset, liability, or both?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
__________________________________________________________________

Notes to the Teacher

This module is designed for the students to fully acquire
the expected learning competencies.
It includes series of activities
which are suggested to be accomplished for better understanding
and mastery of the lesson. The teacher should give proper
assistance when necessary.

What’s New

5
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?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________
_ _________________________________________________________

What is It

Congratulations! You were able to know your career path as early as now. Today, we
will discuss the forecasting financial statements for Entrepreneurship as a career.
This will help you to know more of the Entrepreneurship (negosyo) curriculum exit.
Let us start now with the lesson.

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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)
Year 2011 % 2012 % 2013 % 2014 % 2015 %

Sale Forecast
1,000.0 100.0 1,100.0 100.0 1,200.0 100.0 100.0 100.0
Past Sales (Php 100)
Sales Forecast (Php 000) 1,331.00 1,464.00

Past Cost of Sales (Php) 700.0 70.0 781.0 71.0 835.0 69.0

Cost of Sales Forecast

In Percentage Terms 70.0 70.0

In Peso Value (Php 000) 932.0 1025.0

-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)

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 Audited Forecasted Assumption Used
Balance Sheet Balance Sheet
as of Dec. 31, as of Dec. 31,
2012 2013

ASSETS
Current Assets
Cash
Accounts Receiveable
Inventories
Php 10,000 Php 10,000 Minimum cash balance
30,000 45,000 30 days of Sales (latest month)
15,000 22,500 15 days of Sales (ltest month)
Total Current Assets 55,000 77,500
Gross Fixed Assets

100,000 119,000 Additional deptreciation computed

Accumulated Depreciation
at Php 19,000

40,000 50,000 Additional deptreciation computed

at Php 10,000

Net Fixed Assets 60,000 69,000

Other Assets

5,000 5,000 Assume same level as last year

Total Assets Php 120,000 151,000

LIABILITIES
Current Liabilities
Accounts Payable

15,000 22,500 Enterprise experience where

Accrued Expenses the level of Accounts Payable

Short Term Loans

is roughly the same as the

inventories level

5,000 7,000 Same but additional Taxes Payable

included.

10,000 7,000 Balancing Figure to make

Liabilities equal to Assets

Total Current Liabilities 30,000 36,500

Long Term Loans

Stockholder's Equity 50,000 69,000 Increased by Php 19,000 due to

Paid in Capital

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 additional Fixed Asset acquisition

of Php 19,000

30,000 30,000 Same level as last year.

10,000 16,000 Additional Net profit after Taxes
Total Stockholder's Equity 40,000 46,000

Total Liabilities and Php 120,000 Php 151,500

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.

Income Forma Income Comments

Statement Statement

Sales Php Php 540,000

540,000
Cost of Good Sold 340,000 340,000

Gross Profit 200,000 200,000

Operating Expenses 186,000 186,000

Less Interest Expenses 6,000 6,800 Additional Expenses of Php 800

Equals Net Profit before Taxes 8,000 7,200

Less Taxes 2,000 1,800 Taxes Decrease by Php 200

Equals Net Profit after Taxes Php 6,000 Php 5,400 Net effect of Php 600

 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 last Balance Sheet)
Php 1,000

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 Add Source of Funds
Increases in Liabilities Accounts
Decreases in Assets
Accounts Equals Cash Avalaible
Subtract Uses of Funds:
Decreases in Liabilities Accounts
Increases in Assets Accounts
300
600
Php 1,900

500
200
Equals Net Cash Position 1,200
-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
(as of last Balance Sheet)
Php 1,000

Add Source of Funds:

Increses in Liabilities Accounts
Decreases in Assets Accounts 300 add 200
600

Equals cash Available Php 2,100

Subtract Uses of Funds:

Decreases in Liabilities Accounts
Increases in Assets Accounts 500 add 200
200

Equals Net Cash Position Php 1,200

-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)
Actual Projected for 2013
January to December 2012 Jan Feb Mar Apr May Jun Jul
Sales* 450,000 50,000 55,000 60,000 60,000 55,000 55,000 50,000
Cost of Sales
Materials
Labor
130,000 15,000 16,500 18,000 18,000 16,500 16,500 15,000

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 Manufacturing 68,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Overhead
Depreciation
Total Cost of Sales
36,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Gross Profit 36,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Selling General 270,000 27,000 28,500 30,000 30,000 26,500 26,500 23,000
and
Administrative
Expenses**
Operating Profit 180,000 23,000 26,500 30,000 30,000 26,500 26,500 23,000
Interest Expenses***
Net Profit Before Taxes
Taxes*** 100,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Net Profit After Taxes

80,000 11,000 14,500 18,000 18,000 14,500 14,500 11,000

72,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000
8,000 5,000 8,500 12,000 12,000 8,500 8,500 5,000
2,000 1,250 2,125 3,000 3,000 2,125 2,125 1,375
6,000 3,750 6,375 9,000 9,000 6,375 6,375 3,625
-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.

What’s More

Did you learn a lesson in this module? To better understand it, let’s have
another activity. Enjoy!

Activity 4:
1. Give the four financial statements. Give a brief a statement on how can we
construct them.
a. ____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
b. ____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
c. ____________________________________________________________________
____________________________________________________________________
____________________________________________________________________

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 d. ____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
2. How can planning through Financial Statement be useful for the
entrepreneur?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Activity 4.1. Use the following scenario to fill out the Monthly Cash Flow
Statement Worksheet.

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

You pay your You pay your car You pay for Your monthly
renter's insurance insurance of $150 monthly groceries utilities are due.
of $20 $200 You owe $125.

Your monthly bill It's your mother's taxes come out

for gasoline birthday. You of your paycheck you go to a movie

comes in and you purchase a $50 Federal Tax $150 with a frind that
must pay $75 present State tax $50 cost $10
Social security $200
You put $100 into You hit a pothole You go out to You find the
savings for a and have a flat dinner with perfect outfit for
vacation at the tire. You must pay friends. Your bill is your date this
beach $75 for a new $25. weekend. You pay
one $100 for the oufit

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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

What I Have Learned

How’s the activity? Did you enjoy it? I hope so. This part is the generalization
which contains the summary of what you learned. I want you to fil in the blanks to
complete the sentence below.

1. In forecasting, it is important to examine the critical values that affect the

industry and business that one is in and assess how these variables will behave
so that ____________________________________________________________.
2. In the deciphering the past financial condition of an enterprise, we have to
quantify the relationships of the many items found in the different financial
statements because _______________________________________________________.
3. Market prices tend to be relatively low in a very competitive business for the
reason that _______________________________________________________________.
4. It is important to realize that if one expects inflation to affect major items in the
Cost of Sales and in the selling prices of the company, then there is a need to
________________________________________________________________________.
5. The forecaster can use either short or long term loans to fund any shortfall in
the financing assets for the reason that ____________________________________.
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 ASSESSMENT 4.1

Now it’s your time to shine! It’s time to apply all the inputs that you learned from
this module. It’s application time!

1. Observe your own financial expenses or monitor your wealth on this week.
Identify one problem that you think you have in managing your expenses. Solve
your identified problem by going through simple steps in managing your
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?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________________________

14
 Assessment

Before the presentation of the mini-lesson, you had your pre-test right? Now,
this will serve as your post-test. This will test you if you were able to understand the
lesson well. Good Luck!

Please answer on a separate sheet of paper.

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 DEPRECIATION EXPENSES

BALANCE SHEET 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.

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 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.

Additional Activities

Now that you know the different forecasting of financial statements in

Entrepreneurship.

Answer the following questions or situations based on what you’ve learned from
the lesson.

1. Name some challenges in making financial statement, other than those

mentioned in this lesson that may occur in future scenarios.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

2. Which among the four financial statements will most likely you will use in
forecasting your own business? Explain your answer.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
3. What do you think will the government impose in preventing financial crisis in
our Country amidst this pandemic situation?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

16
 Areas of 4 3 2 1
Assessment
Ideas Presents ideas in Presents ideas in Ideas are too Ideas are vague
an original a consistent general or unclear
manner manner
Organization Strong and Organized Some No organization;
organized beg/mid/end organization; lack
beg/mid/end attempt at a beg/mid/end
beg/mid/end
Understanding Writing shows Writing shows a Writing shows Writing shows
strong clear adequate little
understanding understanding understanding understanding
Word Choice Sophisticated use Nouns and Needs more Little or no use
of nouns and verbs make nouns and verbs of nouns and
verbs make the essay verbs
essay very informative
informative
Sentence Sentence Sentence Sentence No sense of
Structure structure structure is structure is sentence
enhances evident; limited; structure or
meaning; flows sentences mostly sentences need flow
throughout the flow to flow
piece
Mechanics Few (if any) errors Few errors Several errors Numerous
errors

17
 Development Team of the Module

Writer: ARIEL G. GUTIERREZ – T-II Diosdado Macapagal Memorial High School

Editor: JANE P. VALENCIA, EdD – EPS – Mathematics
Reviewer: JANE P. VALENCIA, EdD – EPS – Mathematics
Illustrator:
Layout Artist:
Language Reviewer:

Management Team

ZENIA G. MOSTOLES, EdD, CESO V, Schools Division Superintendent

LEONARDO C. CANLAS, EdD, CESE. Asst. Schools Division Superintendent
ROWENA T. QUIAMBAO, CESE, Asst. Schools Division Superintendent
CELIA R. LACNALALE, PhD, CID Chief
JANE P. VALENCIA, EdD, Education Program Supervisor, Mathematics
JUNE E. CUNANAN, Education Program Supervisor/ Language Editor RUBY
M. JIMENEZ, PhD., Education Program Supervisor, LRMDS

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