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4.2 Discussion: Collaboration Forum   Getting Started This forum is a general collaboration forum that serves as a venue to discuss, interact with, communicate about, and genuinely engage the subject matter of the workshop in order to increase each other’s understanding. Importantly, it provides you with a chance to ask questions about the reading, problems, and anything in general, and so represents another opportunity to get assistance with the course concepts and your assignments. Upon successful completion of this discussion, you will be able to: Receive timely advice and assistance with assignments to help achieve learning objectives. Resources Textbook: Analysis for Financial Management Video: Collaboration Forum Introduction Background Information The purpose of this collaboration forum is for students to work together (collaborate) in an effort to better understand assignments. While this forum is not a place to provide all your answers (it is NOT designed to facilitate cheating), it is intended for you to help each other if someone is struggling with a particular problem. Participate early and often. Ask your question in this forum by providing needed problem details for reference, then move on to work another problem. Later, come back and see if anyone has provided help for you or if you can provide assistance to a classmate. Collaboration Forum Introduction Video Instructions There are no points awarded for this activity. However, you will benefit from completing the exercise, as it will provide helpful academic learning opportunities that correlate with the textbook reading, as well as additional activities that support the topics of both your current and future workshop sessions. Refer to the Collaboration Forum Introduction video, found in the Background Information section above. Respond by making at least one comment or post that addresses one of the following: Ask a question about this workshop’s assignments. Provide an attempted solution or at least a reference to relevant material in the textbook. Share insights, new understandings, or “ah ha” moments resulting from your reading or work on assignments. Deepen the discussion by raising the application or the implications of a concept presented in the textbook or devotional materials. Post a proposed solution to a question raised by another student and then dialogue about it in this forum, attempting to reach a solution. Your postings should: Clearly state the problem number and problem details, and the questions that you have. Provide clear questions and proposed answers with evidence of critical thinking by incorporating material from the assigned reading. Add greater depth to the discussion by introducing new ideas or observations. Provide clarification to classmates’ questions and provide insight into the discussion. ======================================================   4.3 Discussion: Creative Accounting Debate (Response)   Getting Started Creative accounting has been defined as practices that follow the technical requirements of laws and regulations but still deviate from the intent of those standards. While this sounds deceitful on the surface, not all practices that operate outside of normal accounting rules are automatically harmful. It depends on the intent. The use of adjusted earnings, for example, is so commonplace that it is now debatable whether the practice even qualifies creative accounting. Upon successful completion of this discussion, you will be able to: Evaluate the impact of regulatory changes on financial operations. Analyze the appropriateness of creative accounting measures. Resources Textbook: Analysis for Financial Management Website: Connect File: Higgins Chapter 3 Slides File: Higgins Chapter 4 Slides Background Information Research has shown that adjusted earnings is, in fact, a better predictor of future financial performance than standard accounting earnings. This would seem to support many executives’ argument that the measure is valuable to investors. If the intent is to present investors with the most accurate and informative picture of the company’s financial position, then presenting adjusted earnings may be the best way to do that. Preventing company leaders from using tools that help them communicate effectively, particularly if they are still meeting the requirements of the law, seems to only punish the company’s stakeholders. Already, evidence exists that laws like Sarbanes-Oxley and Dodd-Frank are overly restrictive. On the other hand, the consistent bias of these measures is hard to ignore. Questioning executives’ motives is easy when the methods they use regularly favor their companies. Many see the use of adjusted earnings as the beginning of another slippery slope, where once again company leaders will exploit loopholes and stretch the limits of the law until disaster occurs. This will prompt new, even stricter laws to be passed, starting the cycle once more. This pattern calls into question the effectiveness of such laws, but it is debatable whether this means they should be rescinded or greatly strengthened. Instructions Review the rubric to make sure you understand the criteria for earning your grade. In your textbook, Analysis for Financial Management, read Chapter 3, “Financial Forecasting,” and Chapter 4, “Managing Growth.” Download and review the Higgins Chapter 3 Slides and Higgins Chapter 4 Slides to help you further understand the chapter concepts. Select an initial post made by one of your classmates in the previous workshop stating their positions as to whether or not regulations like Sarbanes-Oxley have been effective and whether it is legitimate to use creative accounting measures like adjusted earnings. Craft a response refuting their positions. Copy the initial post to the beginning of your response. Explain why you disagree with their positions. Note: it is not important whether you actually disagree or not. Instead, your goal is to construct a well-supported, logical counterargument, demonstrating your understanding of an opposing perspective.   Reference at least one biblical principle with a specific Bible verse that you feel is relevant to your argument. For instance, review the reflection for this workshop (4.1 Exercise), and consider the impact of uncertainty in financial planning on the appropriateness of these regulations and measures.  Support your counterargument with appropriate sources. Use your textbooks and search OCLS for relevant scholarly sources to support your position. Your post should include at least one academic source that is properly cited. For questions on APA style, go to OCLS APA Writing Styles Guides. This single response should be 200–400 words in length. Your post is due by the end of the workshop =======================================    4.4 Assignment: Spreadsheet Exercises Getting Started For the last few workshops, we have been looking backward, examining historical financial information. In this workshop, we are now looking forward. Analyzing history can only take us so far. While it is informative and helps provide a foundation for decision making, to bring our great product and project ideas to fruition requires planning. With this exercise, you will have an opportunity to further develop your financial planning skills. Upon successful completion of this assignment, you will be able to: Create pro forma financial statements in support of strategic planning and decision making. Apply cash budgeting techniques to assess a company’s external financing needs. Evaluate growth challenges and recommend strategies to cope with them. Resources Textbook: Analysis for Financial Management Website: Connect File: Higgins Chapter 3 Slides File: Higgins Chapter 4 Slides File: Assignment 4.4 Worksheet File: Workshop Four Practice Problems Workbook Background Information Overemphasizing the importance of good financial planning would be difficult. Entire books have been written about mistakes made due to poor financial planning, both in the world of personal and corporate finance. Good financial planning can prevent errors, help managers better evaluate options, and leave a company better prepared for uncertainty. Bad financial planning can be simply misleading. Fortunately, there are techniques available to help us be better financial planners. These techniques are simple but well tested.  With this assignment, you will complete a series of short exercises designed to help you practice your financial planning skills and improve your ability to draw constructive conclusions to move a company forwards.  Instructions Review the rubric to make sure you understand the criteria for earning your grade. In your textbook, Analysis for Financial Management, read Chapter 3, “Financial Forecasting,” and Chapter 4, “Managing Growth.” Download and review the Higgins Chapter 3 Slides and Higgins Chapter 4 Slides to help you further understand the chapter concepts. Study the provided practice problems and solutions in the Workshop Four Practice Problems Workbook to help you better understand the processes used to analyze financial statements. Using Assignment 4.4 Worksheet (course exclusive), complete all eight of the following problems: Pro Forma Financial Statements: Problems 1 and 2 Preparing a Cash Budget: Problems 3 through 6 Growth Management Analysis: Problems 7 and 8 Be sure your Excel spreadsheet is prepared in a professional manner, with answers clearly indicated and all your calculations shown. Full credit will not be given if your process for arriving at the answer is not fully displayed, including any intermediate steps. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop. ===============================================   4.5 Assignment: Mini Case Study   Getting Started In the last workshop, you had the opportunity to apply your developing financial analysis skills to assess the strength of a real-world company to cope with a hypothetical growth challenge. With this assignment, we are going to extend that analysis by first evaluating the actual growth challenges faced by the company of your choice and then making recommendations for how the company should best manage these challenges going forwards. Upon successful completion of this assignment, you will be able to: Utilize financial analysis techniques to assess the financial strength of an organization. Recommend improvement strategies based on financial analysis. Evaluate growth challenges and recommend strategies to cope with them. Resources File: Higgins Chapter 3 Slides File: Higgins Chapter 4 Slides Video: Franchising and Managing Growth Background Information We commonly hear about maturing companies who are struggling to reignite the growth they once enjoyed. However, as you have already studied in this workshop, managing rapid growth can also be a surprisingly difficult challenge. In the last workshop, you selected a real-world company to investigate. This company is predictably facing one of these growth challenges: either growth is falling short of what the company is capable of sustaining, or growth is exceeding sustainable levels. Both scenarios require skillful management. In this assignment, you are returning to the role of financial consultant for your chosen company. You will first assess whether the company is either suffering from too little or too much growth. You will evaluate what actions the company has already taken to cope with this challenge and then make recommendations for what steps could be taken in the future to help the company move forwards successfully. Instructions Review the rubric to make sure you understand the criteria for earning your grade. In your textbook, Analysis for Financial Management, read Chapter 3, “Financial Forecasting,” and Chapter 4, “Managing Growth.” Download and review the Higgins Chapter 3 Slides and Higgins Chapter 4 Slides to help you further understand the chapter concepts. View Franchising and Managing Growth to hear a financial executive discuss some of the challenges of managing rapid growth. Research the financial statements for the company you chose for the 3.5 Assignment. Note: it is particularly recommended for this assignment you locate the annual statements (called “10-K” forms) for your company through the company’s web site or by using the SEC’s EDGAR system.    https://www.sec.gov/edgar.shtml        Annual statements will often include commentary explaining recent financial challenges and plans for the future. Many free financial websites, such as Morningstar    https://www.morningstar.com/     , provide financial data and ratios for public companies. Search for your company on Morningstar and then select “Operating Performance” for a list of ratios for previous years. Consider accessing company reports through OCLS using the Business Insights: Essentials tool. Detailed financial and investment reports are available for hundreds of companies. Prepare a paper analyzing the company’s growth challenges and making appropriate recommendations: Using the sustainable growth equation from your textbook, calculate the company’s sustainable growth rate for at least the past three years. Compare your calculated sustainable growth rate to the company’s actual growth rate in sales during this period. Begin your paper by creating a table showing the company’s actual growth rates, the sustainable growth rates you calculated, and the four components of sustainable growth: profit margin, retention ratio, asset turnover, and financial leverage (assets/equity).  Describe what growth challenge the company is currently facing. Analyze what actions the company has taken to deal with their particular growth challenge. Your analysis should be based on changes in the components of sustainable growth, on the actions reported by executives in annual reports, and on any other commentary you discover through your research. Make a series of specific recommendations on what actions the company could take in the future to address its growth challenges. Be sure to provide a detailed analysis and recommendation that demonstrates your critical thinking and understanding of financial analysis. Your finished paper should be 500–600 words in length. Prepare your paper in Microsoft Word in a professional manner, using proper spelling, grammar, and APA style. Include a reference list. Be sure to cite your sources appropriately for your financial data and any commentary or analysis you rely upon. For questions on APA style, go to OCLS APA Writing Styles Guides. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop.I would argue that Sarbanes-Oxley has been effective at discouraging executives from misleading investors. The fact that they are now personally accountable for any false or misleading statements to investors greatly increases the risk of penalty for any wrongdoing. When an individual is leading a publicly traded company, large or small, investors need to know they can trust that individual and what they are presenting as the truth. Proverbs 11:1 says, “A false balance is an abomination to the Lord, but a just weight is his delight.” The bible reminds us that in all things, in this case business dealings, honest and integrity should take the spotlight. By holding those in charge responsibility for withholding the accurate accounting information, Sarbanes-Oxley has attempted to take away the temptation to mislead investors for personal gain. A large benefit of Sarbanes-Oxley is the requirement of a third party to verify financial information as well as testing of internal controls on a quarterly basis. This has allowed investors and creditors a reliable source for accurate information. However, these audits have increased costs for these companies. These extra costs can be a burden, especially on smaller companies who may not have the extra capital to pay for these additional costs. Even with the additional costs, I would argue that it is still in the best interest in investors and creditors alike to have these assurances that the financial data they are being presented is accurate. With the knowledge I have of Sarbanes-Oxley I would say it is currently doing its job and is good where it is at. It does not need to be strengthened or repealed at this time. I would argue that it is legitimate and can be appropriate for executives to present adjusted earnings. There are times when circumstances have caused balance sheets to be skewed in a way that is not typical from year to year. An example would be a large acquisition or an unforeseen, one time, cost of the same nature. This allows the company to show more accurate trends and gives investors a better idea of year to year earning/loses in a simplified manner. With that being said, it is extremely important that this companies report how and why they made these adjusted earnings so their investors/creditors can understand how these financial statements are prepared. Ahrenstorff, R (2017, June 8) The 4 Biggest Pros and Cons of the Sarbanes-Oxley Act KT Connections https://ktconnections.com/blog/the-4-biggest-pros-and-cons-of-the-sarbanes-oxley-actManaging Growth Chapter Four Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 Different Phases of the Life Cycle Pose Different Challenges Consider a firm in its rapid growth phase. Sales growth requires investment in AR, inventory, and productive capacity. Consider a firm in its declining phase. Often the cash produced isn’t required for further investment and must be used elsewhere. Ch. 4 2 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Company Life Cycle Startup (usually with losses) Rapid growth (with infusions of outside financing) Maturity (generating cash) Decline (marginally profitable, with cash to search for new products, investments) Ch. 4 3 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. FIGURE 4.1 New Sales Require New Assets, Which Must Be Financed Ch. 4 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Higgins, Analysis for Financial Management, 12e Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Sustainable Growth Rate A company’s sustainable growth rate is the maximum rate at which it can grow without depleting financial resources. The sustainable growth rate is based on the assumption that management will not sell new equity and will maintain a constant debt ratio. Ch. 4 5 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Sustainable Growth Rate = g* What limits the rate at which this company can increase sales or, more generally, its overall expansion? From Figure 4.1, the limit to growth is the rate at which equity expands. New equity→New debt→More assets→More sales Therefore, g* is the ratio of the change in equity to equity at the beginning of the period. Ch. 4 6 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Equations for g* Ch. 4 7 WhaFinancial Forecasting Chapter Three Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 Introduction From the past (Chapters 1 and 2) to the future. . . financial forecasting planning budgeting This chapter describes techniques that are part of planning. Ch. 3 2 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Why financial forecasting? Much of the language of business forecasting is financial. A key issue in any plan is determining whether it is financially feasible. Ensure the consistency of internal goals. Be prepared for various possible outcomes. Other reasons? Ch. 3 3 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Pro Forma Statements Pro forma financial statements are a prediction of what financial statements will look like in the future. A major purpose is to estimate the future need for external funding. Ch. 3 4 External funding required = Total assets – (Liabilities + Owners’ equity) Why do practitioners call this the “plug”? Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Percent of Sales Forecast future sales, and tie other items in income statement and balance sheet to the sales forecast Works well for variable costs, most current assets, and current liabilities Not generally true for fixed assets Ch. 3 5 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Steps to Creating Pro Formas Examine historical data to observe patterns. Forecast sales. Forecast items that grow in proportion to sales. Forecast other financial statement items Estimate external funding required Evaluate how to cover the shortfall (or use the surplus) Ch. 3 6 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Example: R&E Supplies R&E Supplies, Inc. is a wholesaler of plumbing and electrical supplies. R&E has been a customer of Suburban National Bank for many years. Average deposits have been $30K. Short-ter#1 Assignment 4.4 Exercises Problem 1: Creating Proforma Financial Statements 5 Points A pro forma Income Statement for Monroe Products Co. is displayed below: Monroe Products Company . Income Statements, 2019 and Pro Forma 2020 Years Ended December 31st 2019 Actual 2020 Forecast Net Sales $ 1,000,000 $ 1,250,000 Cost of Goods Sold 800,000 1,000,000 Gross Profit $ 200,000 $ 250,000 Operating Expenses 100,000 125,000 Depreciation Expense 50,000 62,500 Operating Income (EBIT) $ 50,000 $ 62,500 Interest Expense 10,000 12,500 Taxable Income $ 40,000 $ 50,000 Income Tax Expense 15,000 18,750 Net Income $ 25,000 $ 31,250 Use the information given to construct the Pro Forma Balance Sheet for 2020. a) Sales growth is projected to be 25\% in 2020, and Current Assets is expected to grow with Sales. What should Current Assets be in 2020? b) Monroe Products plans to purchase $100,000 of fixed assets in 2020, but will not dispose of any existing fixed assets. What should be its forecast for ending Net Fixed Assets in 2020? c) If Monroe Products pays out 40\% of its Net Income in 2020 (payout ratio) and will neither sell nor repurchase equity during the year, what should its forecast for owners equity be at the end of 2020? d) Given all the above information, What is Monroe Products projected external funding required for 2020? Use the Template Provided Below to Create Your Solution - Be sure to show or explain your work to get full credit! Input / Output area: Monroe Products Company Balance Sheets, 2019 and Pro Forma 2020 December 31st 2019 2020 Forecast 2019 Common Size Current Assets $ 500,000 Current Liabilities $ 200,000 $ 250,000 Long-Term Debt $ 100,000 $ 125,000 Net Fixed Assets $ 400,000 Owners Equity $ 600,000 Total Assets $ 900,000 $ - Total Liabilities and Owners Equity $ 900,000 $ 375,000 External Financing Needed: $ (375,000) This is the Student Template, provided in the assignment instructions October 2019 #2 Assignment 4.4 Exercises Problem 2: Creating Proforma Financial Statements 10 Points The 2019 Income Statement and Balance Sheet are given below for Van Buren Enterprises. Using the assumptions provided, create the 2020 Pro Forma Income Statement and Balance Sheet. What is the External Funding Required? Van Buren Enterprises . Van Buren Enterprises Income Statement ($ thousands) Balance Sheets Year Ended December 31st, 2019 Year Ended December 31st, 2019 ($ thousands) 2019 Actual Net Sales $ 9,870 2019 Actual 2019 Actual Cost of Goods Sold 8,093 Current Assets Current Liabilities Gross Profit $ 1,777 Cash and Securities $ 540 Accounts Payable $ 843 Accounts Receivable 1,485Example 1 Workshop Four Practice Exercises Example 1: Creating Proforma Financial Statements The 2019 Income Statement and Balance Sheet are given below for Mentor Johnson Enterprises. Using the assumptions provided, create the 2020 Pro Forma Income Statement and Balance Sheet. What is the External Funding Required? Mentor Johnson Enterprises . Mentor Johnson Enterprises Income Statement ($ thousands) Balance Sheets Year Ended December 31st, 2019 Year Ended December 31st, 2019 ($ thousands) 2019 Actual Net Sales $ 11,231 2019 Actual 2019 Actual Cost of Goods Sold 5,829 Current Assets Current Liabilities Gross Profit $ 5,402 Cash and Securities $ 830 Accounts Payable $ 810 Accounts Receivable 2,120 Accured Wages 115 Sales Commisions $ 562 Inventory 830 Unearned Revenue 1,240 Warehouse Lease 2,986 Total $ 3,780 Total $ 2,165 Depreciation Expense 450 Operating Income (EBIT) $ 1,966 Long-Term Debt $ 1,830 Interest Expense 183 Net Fixed Assets $ 3,830 Owners Equity Taxable Income $ 1,783 Common Stock $ 100 Retained Earnings 3,515 Income Tax Expense 374 Total $ 3,615 Net Income $ 1,409 Total Assets $ 7,610 Total Liabilities and Owners Equity $ 7,610 Mentor Johnson Enterprises Assumptions for 2020 Growth rate in Net Sales 10\% Long-Term Debt ($ estimate) $ 1,830 Cost of Goods Sold (\% of Sales) 52\% Cash/Securities (Days of Sales) 25 Sales Commissions (\% of Sales) 5\% Accounts Receivable Period (Days) 70 Warehouse Lease (estimate $) $ 3,200 Inventory Turnover 7 Depreciation Expense (estimate $) $ 465 Accounts Payable Period (Days) 30 Interest Expense (Total estimate $) $ 247 Accrued Wages ($ estimate) $ 135 Tax Rate 21\% Unearned Revenue (\% of Sales) 10\% Dividend Payout Ratio 70\% Net Fixed Assets ($ estimate) $ 4,180 Assume the Interest Expense estimate includes the cost of any new debt required, and Common Stock will not change. Create the 2020 Pro Forma Balance Sheet and Income Statements. What is the External Funding Required? Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution. This is the student Practice Problem file, provided in the assignment instructions October 2019 Ex # 1 Solution Workshop Four Practice Exercises Example 1: Creating Proforma Financial Statements The 2019 Income Statement and Balance Sheet are given below for Mentor Johnson Enterprises. Using the assumptions provided, create the 2020 Pro Forma Income Statement and Balance Sheet. What is the External Funding Required? Mentor Johnson Enterprises . Mentor Johnson Enterprises Income State