Chapter 13. Financial Statements Forecasting

The objective of financial statements modeling, that is, creating pro forma financial statements, is to make financial projections for the future that can be used to make decisions. Financial statements models are probably the most widely used type of financial model and they are used extensively in corporate finance for planning, credit analysis, mergers and acquisitions analysis, business valuations, and many other applications. Financial statement models are especially useful to answer "what if" questions. Depending on the application, the models may be created for abbreviated financial statements or they may be created with extensive details including various supporting schedules that feed into the primary financial statements. Even for making minor decisions it is always safer to do projections with financial statement models instead of doing back-of-the-envelope calculations; it significantly reduces the chances of leaving out certain items and making wrong projections.

Review of Theory and Concepts

Financial statement modeling generally involves modeling all the three primary financial statements: the income statement, the balance sheet, and the statement of cash flows. This last one, however, does not have to be modeled independently because it is derived from the other two. The models almost always include a series of financial indicators that can be used to make decisions. It is also customary to prepare a number of sensitivity ...

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