About Lesson
LOS G requires us to:
describe how ratio analysis and other techniques can be used to model and forecast earnings.
a. In order to forecast the future financial performance, one can build models or Pro-forma statements based on past trends, the relationship between the income statement and balance sheet, and forecasts for growth.
b. One can start by forecasting the revenues and fit that into the common-sized statements to calculate the forecasts for other data. The balance sheet and cash flow statements can also be built based on the same.
c. The statements so prepared can be used as a base for the sensitivity analysis (what-if analysis), scenario analysis (in case of certain events), and simulation-based on probability models.