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Financial Planning and Analysis

a. Provide assumptions for the following before preparing the budgeted financial statements:

  • Sales Growth Rate
  • Operating Profit%
  • Net Profit Margin%
  • Operating Working Capital to Sales
  • Net Long-Term Asset Turnover
  • Dividend Growth Rate
  • Shares Outstanding
  • Interest-Bearing Debt-to-Equity Ratio

Ans: I am preparing the budget for the next year. Additionally, Apple has not indicated any significant shifts in strategy that could impact future performance, so I will assume normal conditions.

Sales forecast growth –

Forecasting sales is challenging. An excellent place to start is with the most recent period’s sales and make adjustments for recent sales trends, industry trends, and macroeconomic conditions. Given that Apple has been established for many years. Apple sales growth from 2017 to 2018 was 15.86%.

Apple has five reportable segments. The America reportable segment as sales growth from 2017 to 2018 was 16%, Europe segment has sales growth from 2017 to 2018 was 14%, The greater china has sales growth from 2017 to 2018 was 16%, Japan has sales growth of 23% and rest of Asia pacific was 15% and, I expect the segments to continue growing at their recent rates. I will assume the sales growth of 18% in 2019 [Apple Annual Report]

Operating profit forecast-

Operating profit is an important measure of future firm performance and similar to earnings, is expected to be closely related to the prior period's operating profit. Apple's operating profit to sales for 2018 from the common size statement was 26.70%. Since Apple provides segment data for operating profit, for America segment operating profit to sales was 31.76%in 2018, for Europe segment operating profit to sales was 30.05%, The greater china segment has operating profit to sales was 38.04%, Japan has operating profit to sales was 45.66% and for rest of Asia pacific operating profit to sales was 34.90%. The Japan segment is struggling to generate higher operating profit despite the additional resources that Apple has devoted to it. I will assume Operating profit to be 27% in 2019. [Apple Annual Report]

Net profit margin forecast-

Net profit margins tend to be unstable. Most firms don’t report sufficient data to compute profit margins by segment. Apple’s net profit margin for 2018 was 22.40% (from the common size income statement), so I’ll use 20% in my forecast.[Apple Annual Report]

Operating Working Capital Forecast-

Operating working capital is defined as:

 [(Current Assets – Cash and Marketable Securities) – (Current Liabilities-Short-term and current portion of long-term debt)] / Sales

Operating working capital excludes financing components such as cash, marketable securities, and notes payable. Apple’s operating working capital to sales for 2018 was 4997/265595*100= 1.88% [from the balance sheet: (131339-25913-40388) – (115929-55888) =4997]. [Apple Annual Report]

Overall, Apple seems to have sufficient working capital, although it would be beneficial to have data on receivables and inventory turnover for each segment to better understand. Apple’s operating working capital to sales ratio to remain near its current level of 1.88%, which I will use in the forecast.

Long term Assets forecast-

Net Long-Term Assets is calculated as follows:

Net Long-Term Assets = Total Long-term Assets, net – Non-interest-bearing long-term liabilities

Net Long-Term Asset Turnover = Sales / Net Long-Term Assets

From the balance sheet: 365725(total assets)-131339(current assets) – 48914(non-interest bearing liability) = 185472 [Apple Annual Report]

Here, Net Long-Term Asset Turnover = 265595/185472=1.43

Firms don’t typically provide long-term assets by reporting segments (although this information is available for geographic regions), I’ll use turnover for 2018 as the basis for the forecast.

Capital Structure Forecast-

Capital structure tends to remain stable over time. Apple has not indicated any major initiatives that will require external financing, so I expect its current capital structure to remain the same for the next year. Apple‘s interest-bearing debt-to-equity ratio for 2018 was 93735/107147*100=0.87. [Apple Annual Report]

Cash Flow Forecast-

After completing the forecasted income statement and balance sheet (except for cash), it is fairly straightforward to derive cash flows. I’ll start with net income and make adjustments for changes in operating working capital, changes in net long-term assets (investing), and changes in net debt (financing) and dividends (financing). Note that I’ll need the ending cash balance from the forecasted statement of cash flows to complete the balance sheet.

Common Stock and Cash Dividends Forecast-

The annual dividend/share was $2.72 in 2018. , I expect Apple to continue paying a cash dividend. I assume that Apple will increase this slightly in 2019 to $2.78/share, an increase of about 2.2% that is consistent with the growth in its dividends over the past year. [Apple Annual Report]

Share Outstanding-

The outstanding shares in 2018 was 4754986 and I will expected to increase in the shares in 2019 to about 4812365. [Apple Annual Report]

Interest bearing debt to equity ratio-

The interest bearing debt to equity ratio in 2018 was about 0.95 and I will expect to increase in interest bearing debt to equity to about 0.97. [Apple Annual Report]

Apple condensed Income Statement

2019 forecast

Net Sales


Operating Profit


Net Income


 *Shareholders equity= 107147 (SE) + 71437 (NI) - 12.93 (cash dividend) =$178571.07m

**Interest bearing debt = 178571.07 (SE) *0.87= $155356.83m

*** From cash flow statement

Apple Condensed Balance Sheet


(as reported)

2019 Forecast

Cash and Cash Equivalents



Operating Working Capital



Net Long-Term Assets

$ 185472

$ 219162

Net Operating Assets



Interest-Bearing Debt



Total Shareholders’ Equity



Net Capital




Apple Condensed Statement of Cash Flows

2019 Forecast

Net Income


Less: Increase in Operating Working Capital


Less: Increase in Net Long-Term Assets


Add: Increase in Interest-Bearing Debt


Less: Cash Dividends


Net Increase in Cash Flows


Cash at 12/31/18


Forecasted Cash at 12/31/19


b. Compare your forecast to your company’s actual results for fiscal 2019 and explain any differences. The MD&A section is a good place to look for explanations for these differences.




Sales Growth Rate



Operating Profit%



Net Profit Margin%



Operating Working Capital to Sales



Net Long-Term Asset Turnover



Dividend growth rate



The biggest difference in the above table is for sales growth rate. Sales fell in 2019, while I forecast an increase of 18%. Management explains the change in sales in the MD&A section:

The net sales of America have increased from 2018 to 2109 by 4.3%, Europe segment sales have increased from 2018 to 2019 by 3.14%, The greater china segment has reduced sales from 2018 to 2019 by 15.91%, Japan segment has shown slight decrement from 2018 to 2019 by 1.04% and rest of pacific Asia has shown increment from 2018 to 2019 by 2.19%. Although all the segments show mixed results of growth but not showing major growth hence there is a decrease in the overall sales of Apple.

My forecast assumption was on an average of 18 % considering all the segments. Both of these forecasts were substantially off. Apple's segment continues to struggle, dimming hopes for overall growth. Note that the volatility in segment performance will decrease the reliability of forecasts. When a company consolidates its operations, it must do so in the reporting currency, which is $US for Apple. Unfavorable foreign currency impacts arise when the local currency (Euro in this case) buys fewer US dollars. Unfavorable foreign currency fluctuations were the main reason for the decrease in sales. These fluctuations are very difficult to predict.

Operating profit % has reduced so because the overall sales have been fallen in different segments in 2018. There was much rise from 2017 to 2018 but there is a sharp decline in sales in 2019 as compared to 2018 i.e. the operating profits have also been reduced to such extent and because of the market conditions were not as good in 2019 as compared to 2018. So Apple did not sell its products hence a decrease in sales and hence a decrease in operating profit %.

Net profit margin % decreased slightly, due to lower sales, a higher interest expense.

There was a fairly substantial decrease in Operating Working Capital to Sales. This occurred despite the large drop in sales primarily due to lower accounts receivable. This surprised that the trouble Apple had with accounts receivable in the past. Operating working capital also fell due to higher accrued expenses, but the company did not provide any detail about this change in the MD&A section.

Net Long-Term Asset Turnover has been increased more than the forecast.

The dividend growth rate has also increased far more than the forecast by 10.3% as the company is not having more profits as compared to 2018 so the company is distributing the profits in the form of dividends to the shareholders.

c. Ans: The operations function plans production based on forecasted sales. It includes making proper budgets for the purchasing of materials and delegating the personnel to manage the production. Since the sales forecast fell short of actual sales, Apple likely over-budgeted materials, and labor and would have needed to make significant adjustments to both as sales failed to materialize according to budget. Most companies contract for materials well in advance of needing them to obtain favorable pricing. If this is the case with Apple, then they might be committed to buying more materials than they need.

The finance function is responsible for ensuring that adequate capital is available to achieve corporate goals, as reflected in the budget. The amount of cash budgeted for 2019 was. This underscores the importance of having sufficient available credit to meet unexpected challenges in a company’s performance. Notwithstanding sufficient credit, the disappointing sales volume creates stress on the company’s finance function.

A key role of a company's marketing function is to ensure that a company’s products are sold. Since marketing budgets are largely based on the level of forecasted sales, if sales fall short, then adjustments might be necessary to sales personnel, sales prices, commitments for sales promotions (e.g., advertising), and packaging. Apple’s lower sales likely resulted in the consideration of reducing prices. Volatility in sales volume creates difficulty budgeting for marketing activities and might lead to inefficient allocation of resources to the marketing function

d. If applicable, comment briefly on your own experience with the budgeting process.

Ans: The budgeting is necessary for making the forecast on the basis on which one can analyze the trends of the future and makes the transactions of sales and purchases. So the company's financials majorly depend on the budgets and based on which transactions are made in the company. So it is the most important element of the company as it is important for the company’s operating. Financing and marketing decisions.

References for Financial Planning and Analysis

NASDAQ. (2019). Apple Annual Report. Retrieved from https://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AAPL_2019.pdf

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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