The following graph presents the forecast for the Body Shop’s income statement and balance sheet in 2002 to 2004:
How did you derive your forecast? Why did you choose the “base case” assumptions that you did?
The forecast takes into considerations the stated business objectives of the Body Shop as well as trends or patterns in the historical financial statement in exhibit 8. Further information on the calculations and assumptions underlying the forecast is to be explained for each account individually in the following section:
Assumptions related to the sales growth, expenses and earnings parameters
Sales growth: Given the Body Shop’s growth level of 20% in …show more content…
Accounts receivable: The accounts receivable/Sales ratio is assumed to be 8.8 % in 2002 to 2004 which is the weighted average of the accounts receivable/sales ratios in 1999, 2000 and 2001.
Inventories: Assumed to increase by 10 % per year due to the Body Shop’s stated business strategy.
Other current assets: Assumed to stay at similar level as the previous year’s percent-of-sales ratio. The percent-of-sales ratio is 4.5 % which is the weighted average of the previous years.
Net fixed assets: Assumed to increase due to the Body Shop’s business strategy that intends to increase the investment in stores. It is assumed that the body shop will continue to expand its numbers of stores each year, which in this forecast will translate into an annual increase of 5 % increase in the value of net fixed assets.
Other assets: Assumed to keep at the current percent-of-sales level from 2001 equal to 1.8 %.
Accounts payable: Accounts payable has been significantly reduced in previous years, however it is assumed that it will stay at the current percent-of-sales level from 2001 equal to 2.9 %
Taxes payable: Assumed to stay at the current percent-of-sales level from 2001 equal to 1.9 %.
Accruals: Forecasted to be equal to 3.8 % of sales each year which is the weighted average of the