The steps involved in projecting the balance sheet are similar to the steps followed in projecting the income statement. The difference in the two methods is that in the income statement, almost everything is expressed as a percentage of sales, while in the balance sheet items are projected in three different ways:
- Items are projected as a percentage of sales. Almost all current assets and liabilities will be classified under this category
- Items expressed as a percentage of assets. Amortization is generally expressed as a percentage of goodwill, while depreciation is projected as a percentage of gross fixed assets. Another example is allowances for bad debt; it is expressed as a percentage of receivables rather than sales.
- Items projected as a plug. Depending on which route is taken in the projection, Equity or Long-term Debt will be projected as a plug rather than as a percentage of sales.
Let’s go through the assumptions for current assets first.
| Balance Sheet Assumptions |
2000 |
2001 |
2002 |
2003 |
| Cash |
10% |
10% |
9% |
9% |
| Securities |
12% |
12% |
12% |
12% |
| Receivable, Net |
17% |
16% |
15% |
14% |
| Inventory |
7% |
7% |
7% |
7% |
Cash for the next four years (2000-2003) starts with 10% and then declines to 9% of sales in the terminal year.
|
Balance Sheet Assumptions |
2000 |
2001 |
2002 |
2003 |
| Cash |
10% |
10% |
9% |
9% |
The projected sales of the same years are
|
Projected Income Statement |
2000 |
2001 |
2002 |
2003 |
| Net Revenues |
3,286,245 |
3,680,594 |
4,011,847 |
4,252,558 |
Multiplying sales level with the projected cash percentage gives us the projected cash levels for each of the next four years
|
Projected Income Statement |
2000 |
2001 |
2002 |
2003 |
Net Revenues |
3,286,245 |
3,680,594 |
4,011,847 |
4,252,558 |
| Cash – Assumptions |
10% |
10% |
9% |
9% |
| Cash – Projections |
328,625 |
368,059 |
361,066 |
382,730 |
We can use a similar approach to project Net Receivables, Inventory, and Securities as well as Current and Long-term Liabilities.
| Projected Income Statement |
2000 |
2001 |
2002 |
2003 |
| Net Revenues |
3,286,245 |
3,680,594 |
4,011,847 |
4,252,558 |
| Securities – Assumptions |
12% |
12% |
12% |
12% |
| Securities – Projections |
394349 |
441,671 |
481,421 |
510,307 |
| Receivable, Net – Assumptions |
17% |
16% |
15% |
14% |
| Receivables, Net – Projections |
558662 |
588895 |
601777 |
595358 |
| Inventory – Assumptions |
7% |
7% |
7% |
7% |
| Inventory – Projections |
230037 |
257642 |
280829 |
297679 |
| Current Liabilities – Assumptions |
32% |
31% |
30% |
30% |
| Current Liabilities – Projections |
1051598 |
1140984 |
1203554 |
1275767 |
| Long Term Liabilities – Assumptions |
55% |
57% |
59% |
60% |
| Long term Liabilities – Projections |
1807435 |
2097939 |
2366990 |
2551535 |
Property, Plant and Equipment (Net as well as Gross) are also projected as a percentage of sales. Depreciation, however, is expressed as a percentage of gross assets, as mentioned earlier.
| Projected Income Statement |
2000 |
2001 |
2002 |
2003 |
| Net Revenues |
3,286,245 |
3,680,594 |
4,011,847 |
4,252,558 |
| Property and Equipment, Gross – Assumptions |
174% |
175% |
176% |
178% |
| Property and Equipment, Gross – Projections |
5,718,066 |
6,441,040 |
7,060,851 |
7,569,553 |
| Depreciation – Assumptions |
50% |
51% |
52% |
53% |
| Depreciation – Projections |
1,643,123 |
1,877,103 |
2,086,160 |
2,253,856 |
Putting all these individual items together we can obtain a complete picture of AMD’s assets and liability side of the balance sheet.
| Balance Sheet Summary |
2000 |
2001 |
2002 |
2003 |
| Assets | ||||
| Cash |
328,625 |
368,059 |
361,066 |
382,730 |
| Securities |
394,349 |
441,671 |
481,421 |
510,307 |
| Receivables, Net |
558,662 |
588,895 |
601,777 |
595,358 |
| Inventory |
230,037 |
257,642 |
280,829 |
297,679 |
| Total Current Assets |
1,511,673 |
1,656,267 |
1,725,093 |
1,786,074 |
| Property and Equipment, Gross |
5,718,066 |
6,441,040 |
7,060,851 |
7,569,553 |
| Depreciation |
1,643,123 |
1,877,103 |
2,086,160 |
2,253,856 |
| Net Fixed Assets |
7,361,189 |
8,318,143 |
9,147,011 |
9,823,409 |
| Total Assets |
8,872,862 |
9,974,410 |
10,872,104 |
11,609,483 |
| Liabilities | ||||
| Current Liabilities |
1,051,598 |
1,140,984 |
1,203,554 |
1,275,767 |
| Long Term Liabilities |
1,807,435 |
2,097,939 |
2,366,990 |
2,551,535 |
| Total Liabilities |
2,859,033 |
3,238,923 |
3,570,544 |
3,827,302 |
As we have used Equity as a plug, we do not have to calculate the Equity. But just to make sure we cover all the basics we’ll do it for AMD. Remember, Equity is used to balance Total Assets to Total Liabilities.
The equation is
Total Assets = Total Liabilities + Shareholder’s Equity
Or
Shareholder’s Equity = Total Assets – Total Liabilities
| Balance Sheet Summary |
2000 |
2001 |
2002 |
2003 |
| Total Assets |
8,872,862 |
9,974,410 |
10,872,104 |
11,609,483 |
| Less | ||||
| Total Liabilities |
2,859,033 |
3,238,923 |
3,570,544 |
3,827,302 |
| Equals | ||||
| Total Stockholder’s Equity |
6,013,829 |
6,735,487 |
7,301,560 |
7,782,181 |
The complete Balance Sheet looks like this
| Balance Sheet Summary |
2000 |
2001 |
2002 |
2003 |
| Assets | ||||
| Cash |
328,625 |
368,059 |
361,066 |
382,730 |
| Securities |
394,349 |
441,671 |
481,421 |
510,307 |
| Receivables, Net |
558,662 |
588,895 |
601,777 |
595,358 |
| Inventory |
230,037 |
257,642 |
280,829 |
297,679 |
| Total Current Assets |
1,511,673 |
1,656,267 |
1,725,093 |
1,786,074 |
| Property and Equipment, Gross |
5,718,066 |
6,441,040 |
7,060,851 |
7,569,553 |
| Depreciation |
1,643,123 |
1,877,103 |
2,086,160 |
2,253,856 |
| Net Fixed Assets |
7,361,189 |
8,318,143 |
9,147,011 |
9,823,409 |
| Total Assets |
8,872,862 |
9,974,410 |
10,872,104 |
11,609,483 |
| Liabilities | ||||
| Current Liabilities |
1,051,598 |
1,140,984 |
1,203,554 |
1,275,767 |
| Long Term Liabilities |
1,807,435 |
2,097,939 |
2,366,990 |
2,551,535 |
| Total Liabilities |
2,859,033 |
3,238,923 |
3,570,544 |
3,827,302 |
| Total Stockholder’s Equity |
6,013,829 |
6,735,487 |
7,301,560 |
7,782,181 |
| Total Liabilities and Equity |
8,872,862 |
9,974,410 |
10,872,104 |
11,609,483 |
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