To construct a pro forma income statement, one needs to implement sales projections
To construct a pro forma income statement, one needs to implement sales projections. The reason that it is important to establish a sales projection is to allow an organization to have a goal in place and properly execute their inventory, cash flow, projected accounts receivable, and account payable. The financial analysis that does not implement sales projections can prove useless to a firm (Block et al., 2019, p. 98). The reason being is because by implementing sales projection a firm is not being optimistic of their goals and is implementing a realistic outcome that can be used to a firm. Sales projection will be a key tool to translate and calculate the cash budget of an organization (Block et al., 2019, p. 111).
In the 1st Quarter of 2020 for Deere & Company it has a Cash Flow statement that compares the quarterly earnings of February 2, 2020, and January 27, 2019. Cash flow statements will be our guidance in drawing a story of what is occurring with Deere & Company. To understand the sales results of 2020, we will need to analyze the operating and investing activities.
· Operating Activities: To understand the results of sales, we need to look at the status of depreciation, account receivable, account payable, inventory, and the net cash in accordance with the operating activities.
o Depreciation will provide the initial cost of an asset over its useful life (Block et al., 2019, p. 41). The Depreciation of Deere & Company increased from $503 mil to $538 mil for the 1st quarter of 2020. This will provide us with guidance in the increase of a fixed asset, which we will soon find out has been caused by long term borrowing.
o The inventory was analyzed to decrease from $1.396 mil $645 mil in the 1st quarter of 2020. The company decreased the number of funds to continue additional inventory purchases, from $7.402 billion in 2019 to $6.482 billion in 2020 as stated in the balance sheet.
o Furthermore, the account receivable increased from $-507 mil to $70 mil from the rise in financing receivables the organization has established.
o The account payable increased from $698 mil to $1.134 billion and provides an illustration of how the company is keeping up on its bills.
o As for the net cash, it generated negative $508 million in operating activities net cash in 2020, which a slight increase from negative $1.6 billion cash flow in 2019. There is currently negative cash flow in the operating activities that are occurring in Deere & Company. A major player in the change can be analyzed to be the trade, notes, and financing receivables related to sales.
· Investing Activities: Positive net cash from investing activity of $1.026 billion in 2020 in comparison to $969 million in 2019. The net cash of $1.026 billion differs from the previous quarterly year slightly, from an increase of sales of equipment on operating leases.
There are many issues that Deere & Company can encounter when implementing sales projections. The company needs to first understand why they are currently having a decrease in funds to continue additional inventory purchases. It is stated that the company’s agricultural equipment business has uncertainties in the farmer’s market due to farmers\’ confidence and financial condition. The sales projections will consist of consumer spending patterns, real estate prices, construction status, weather conditions, labor supply, consumer lending patterns (John Deere, n.d.). If there is not a proper implementation of sales projection, the company can run the risk of future negative impacts.
References:
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/ (Links to an external site.)
John Deere. (n.d.). Investor relations (Links to an external site.). Retrieved from https://investor.deere.com (Links to an external site.)
Answer preview to construct a pro forma income statement, one needs to implement sales projections
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