• Forecasting Other Balance Sheet Items

    To determine how the other balance sheet items are forecast you will need to dig deeper into the foot notes to see what the drivers are. Do not spend too much time here unless you have guidance from management. Simply make some reasonable assumptions and move on.

    Example: Cisco Other Balance Sheet Items

    Step 1: Set up a new sheet and add the other non-debt balance sheet items that have not already been forecast.

    Step 2: Forecast the assets.

    • Deferred tax assets: Straight-line
    • Goodwill: Goodwill is subject to annual impairment tests and the balance is adjusted accordingly. As such, this too is a straight-line estimate.
    • Other assets: A breakdown of this asset can be found on page 53 of the annual report. Looking at the accounts, it appears that most of them are tied to revenues. Add the drivers at the bottom of the sheet and link them to the other assets.

    Step 3: Forecast liabilities.

    • Income taxes Payable: Straight-line
    • Accrued compensation: As a company grows, it will be required to increase headcount so we are going to link this to revenues.
    • Deferred revenue: Grow this with net income.
    • Income taxes payable: Straight-line
    • Other Long-term liabilities: There is no breakdown of what is in this line item so straight-line it.

    Step 4: Link the items on the balance sheet.

    Step 5: Link the assets to the cash flow statement. You’ll note that the lines do not match up exactly.

    For example, when looking at deferred income taxes, you’ll notice that the changes in cash flow  do not match up with the change in accounts on the balance sheet. This is because we have only forecast the current portion of deferred tax assets and the non-current portion is embedded within the other assets line.

    Similarly, changes in goodwill would be embedded within the depreciation, amortization and other non-cash items line.

    Add these line items to the cash flow statement, group them to make things cleaner and add comments to clarify what you have done.

    Step 6: Link the liabilities to the cash flow statement. As with the assets, there will be line items that do not match up. Add in line items as appropriate.

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