Balance Sheet, Assets

Question 1

Cash and equivalents

Answer 1

Last year cash balance + net change in cash referenced from cash flow statement

Question 2

Accounts receivable (AR)

Answer 2

Grow last year’s AR (EOP) a the current period revenue growth rate. The logic is that, barring a thesis on changing credit terms, the more revenue a company generates, the more A/R they will have. In other word, forecast that days sales outstanding (Days in period x AR / Revenue) stay constant

Question 3

Inventory

Answer 3

Grow last year’s inventory (EOP) at the current period COGS growth rate. The logic is that (barring a thesis that the business will change their inventory turnover), the more goods a company expects to use up (COGS), the more inventory they will need to support their usage and thus the company will maintain the same ratio of investor to COGS (in other words, assume a constant inventory turnover). A less direct but frequently used modelling approach is to grow inventory with sales

Question 4

prepaid expenses

Answer 4

Grow last year’s prepaid expenses (EOP) at the current period SG&A or revenue growth rate

Question 5

Other current assets

Answer 5

If significant, look in the 10k footnotes to try and understand what these ‘other’ assets are comprised of. If there are no disclosures or disclosures suggest that these assets are tied to operations, grow at the revenue growth rate. If, however, there is reason to believe that they are not tied to operations, straight-line projections

Question 6

PP&E

Answer 6

-PP&E (BOP)
\+ Capital expenditures
-Depreciation
-Asset sales
PP&E (EOP)

Question 7

PP&E - PP&E (BOP)

Answer 7

Reference from last period’s EOP

Question 8

PP&E - Capital expenditures

Answer 8

Use equity research or management guidance when available. In the absence of guidance, assume purchases in line with historical trends as a % of sales

Question 9

PP&E - Depreciation

Answer 9

• Approach 1: Forecast as a % of capital expenditures using historical depreciation as a guide.
• Approach 2: Depreciation waterfall analysis (useful when companies provide sufficient detail).

Question 10

PP&E - Asset sales

Answer 10

Barring specific guidance, forecast assets sales of 0 (however some industries like REITs do require asset sales forecasts)

Question 11

PP&E - PP&E (EOP)

Answer 11

Subtotal of PP&E (BOP), Capital expenditures, Depreciation and Asset sales

Question 12

Intangible Assets

Answer 12

+ Purchases
-Amortization
Intangible assets (EOP)

Question 13

Intangible Assets - Purchases

Answer 13

Use equity research or management guidance when available. In the absence of guidance, look at historical purchases (disclosed in the cash flow statement). If historical purchases are significant grow as a % of sales. If historical trends are lumpy or undisclosed, assume no new purchases

Question 14

Intangible Assets - Amortization

Answer 14

Companies typically disclose future amortisation expense for the current intangible assets in 10K footnote. Of course, if forecasting new purchases, this will have incremental impact on future amortisation. In this case apply the historical ratio of amortisation / purchases

Question 15

Intangible Assets - Intangible assets (EOP)

Answer 15

Subtotal of + Purchases and -Amortization

Question 16

Goodwill

Answer 16

Straight-line

Question 17

Deferred tax assets

Answer 17

• Since most DTAs are tied to operations (revenue recognition timing differences and NOLs) grow with revenue
• Straight-lining is also acceptable in the absence of sufficient disclosures to fully understand the nature of the deferred taxes
• DTAs can be both current and non-current

Question 18

Other non-current assets

Answer 18

Forecasting depends on the nature of assets. If most likely tied to operations, grow with revenue. Otherwise, straight-line.