M3 (KP) Student Response
Assignment 1: Discussion—Forecasting and Preparing Financial Statements
Tina, one of your friends, approached you and proposed a partnership in a new venture that she is planning to start—a fashion boutique that will sell women’s clothing and accessories. She told you that she leafed through several books on how to prepare forecasts and pro forma financial statements, but the books were geared toward existing firms that have several years of historical financial statements on which to base their projections.
In this assignment, you will review the accounting concepts and financial statements presented in this module to critically evaluate the challenges faced by your friend in her new business venture.
Respond to the following points:
- If your friend asked you for advice on how to prepare forecasts for a new fashion boutique for women, what would you tell her?
- As a potential partner, what would be the important financial statements to be in place for an initial assessment of the venture? Provide details and justification of each choice.
- Provide substantive comments by
- contributing new, relevant information from course readings, Web sites, or other sources;
- building on the remarks or questions of others; or
- sharing practical examples of key concepts from your professional or personal experiences
- Respond to feedback on your posting and provide feedback to other students on their ideas.
I would tell Tina that she should follow these four steps to develop a pro forma income statement for her boutique:
- Establish a sales projection
- Set up a production schedule
- Calculate your other expenses
- Determine your expected profit
After she creates her sales projection to use as a starting point, she must calculate the cost of goods sold (in a retail store, the cost of goods sold is what the store pays for the products sold) and any other expenses that will need to be subtracted from sales revenue including general and administrative costs, taxes, and interest expenses. This will help to calculate the estimated gross profit (Peavler, n.d.). Her sales forecast is also the support of her business plan and it shows bankers and investors how you she will spend money and her ability to repay loans. Future investors measure a business and potential growth by sales, and the sales forecast helps to set the standard for the business’ expenses, profits and growth.
The important financial statements that need to be in place for an initial assessment of Tina’s business include the balance sheet, the income statement and the cash flow statement. The balance sheet shows the value of the assets you have purchased for startup, how much is owed to lenders and other investors, and any initial investments you have made to get started (“3 Essential”, 2014). The income Statement helps project the business’ income for the first year. The balance sheet reveals the amount of money needed to support the sales and profits that are shown on the income statement. The statement of cash flows is, in my opinion, the most important financial statement because it focuses solely on changes in cash flowing in and out of the business. It helps identify strengths and weaknesses within the business in terms of their ability to generate cash.
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