FINANCE IN A CANADIAN SETTING Sixth Canadian Edition

1. FINANCE IN A CANADIAN SETTINGSixth Canadian Edition Lusztig, Cleary, Schwab

2. CHAPTER FOUR Funds-Flow Analysis and Financial Forecasting

3. Learning Objectives 1. Recognize why statements of changes in financial position are important. 2. Describe the two ways of preparing statements of changes in financial position. 3. Explain what an increase or decrease in funds means in a statement of sources and uses of funds. 4. Discuss how an activity format evaluates a firm’s cash flow. 5. Describe how pro forma statements are used as planning tools.

4. Introduction • Two methods of assessing business performance are discussed • Statement of changes in financial position (SCFP) • Provide insight into where a firm’s funds have been used and come from • Pro forma financial statements • Assists management in forecasting a firm’s future financial position

5. Statement of Changes in Financial Position • The two methods of reporting SCFP are: Sources and Uses of Funds: • compares the balance sheets of a company at two different times • Recognizes all changes in balance sheet accounts • Any  in asset accounts or  liability accounts represent a use of funds • Source of funds assets  liabilities  Use of funds  assets  liabilities 

6. Statement of Changes in Financial Position Funds-Flow Based on Activity: • Categorizes the flow of funds according to major activities including cash flow, financing and investments • Useful in analyzing a firm liquidity • The 3 functional areas include: 1. Operations 2. Long-term financing 3. Investments

7. Pro Forma Financial Statements • Used in projecting future balance sheets and income statements • Several different techniques exist in forecasting accounts such as: • sophisticated estimation techniques • historical projections • Tedious to construct due to future uncertainties

8. Pro Forma Financial Statements • Preparation begins with forecasting revenues by marketing personnel by using a(n): - Internal approach - External approach - Combination of both

9. Pro Forma Financial Statements • From the revenue forecast, other related items in financial statements can be determined based on historical proportions of sales such as: - Cost of good sold (COGS) - Inventory - Accounts receivable

10. Summary 1. Statements of changes in financial position can be prepared using either a source and uses format or an activity format, with both providing essentially equivalent information. 2. A statement of sources and uses of funds is derived by comparing the balance sheet of a firm at two different points in time. It provides information about a firm’s investment over the period under consideration and how such investments were financed.

11. Summary 3. An activity format summarizes the various flows of funds in terms of their effect on the firm’s cash position over a given time period. The resulting funds-flow statement, which is widely used by creditors, is particularly useful in highlighting the firm’s liquidity position. 4. Any increase in an asset or decrease in a liability represents a use of funds. Similarly, any decrease in an asset or liability represents a source of funds.

12. Summary 5. Projected financial statements, also called proforma statements, can be used as planning tools. In projecting financial statements, the forecast of sales or revenues is the basic forecast from which most other entries are derived.