RSM332H1 Chapter Notes - Chapter 4-5: Retained Earnings, Inventory Turnover, Asset Turnover
Document Summary
4. 8 financial forecasting: crucial for firm to decide how to finance itself. Cumulative efr = total assets - spontaneous liabilities - invested capital. Adjustments to na ve forecast: simple forecast ignores factors, retained earnings. Firm will pay off debt in future. Re as % of sales = net profit margin * (1 - dividend payout) Add retained earnings as percent of sales to forecast. Unrealistic to assume straight line relation between cash and sales: more likely to be linear relationship with constant, cash, a/r and inventory, look at macroeconomic factors. A/r could change if firm changes credit policy. Inventory turnover should be constant if macroeconomic factors remain constant. Constant percentage of sales depends on whether single or multi-plant: investment in equipment will be lumpy if single plant, fixed assets. Firm invests every few years, but depreciation happens every year. Smoothed out if multi-plant: marketable securities, spontaneous liabilities. Firms hold marketable securities as temporary resting place for cash.
