11

,...
1.
Explain the process of forecasting

financial statements. (p. 11-3)
5.
2.
Forecast revenues and the

income statement. (p. 11-8)
6.
<Q
3.
Forecast the balance sheet. (p. 11-19)
en
4.
Forecast the statement of

cash flows. (p. 11-29)
U1
Prepare multiyear forecasts of

financial statements. (p. 11-31)
U L
t... )>
m JJ
oz
-f
-z
Implement a parsimonious method for

multiyear forecasting of net operating Profit
and net operating assets. (p. 11-35)
orecasting Financial
tatements
ter & Gamble (P&G), the world's largest consumer products company, is "one of the leaders in the race to harness
ive streams of data for managing a business better. The company has been profit-forecasting on a monthly basis for
40 years, trying to predict components such as sales, commodity prices and exchange rates. But the amount of realtime data it has been able to process has increased vastly ... now P&G
borrows liberally from tools born on the Web: ubiquitous high-speed networking , data visualization and high-speed analysis on multiple streams
of information. The tools allow P&G to make in minutes the decisions that
used to take weeks or months, when data had to be collated and passed
through committees on their way to the top .... P&G is on the verge of
ng everyone's talents known and tracked, all information about sales decided at the executive level every week and proion viewed in near real-time worldwide. The company talks in terms of increasing the amount of collected data sevenfold.
airy promises of networked technology are here, at a scale rarely, if ever, deployed before. " (Forbes 2011)
P&G's financial performance has been impressive. In 2011 , it generated over $13 billion of operating cash flow in one
e most severe recessions in recent memory. Its abundant cash flow allows it to fund the level of advertising and R&D
ssary to remain a dominant force in the consumer products industry as well as to pay over $5.7 billion in dividends to
holders.
P&G's product list is impressive. It consists of numerous well-recognized household brands.
I sales of Procter & Gamble products are distributed across its three business segments
Illustrated in the chart to the side. A partial listing of its billion-dollar brands follows:
Beauty. Head & Shoulders, Olay, Pantene, Wella
Grooming. Braun, Fusion, Gillette, Mach3
Health Care. Always, Crest, Oral-B
Snacks and Pet Care. lams, Pringles
Fabric Care and Home Care. Ace, Ariel, Dawn, Downy, Duracell, Febreze, Gain, Tide
Baby Care and Family Care. Bounty, Charmin, Pampers
Pet Care, 4%
P&G's recent successes have coincided with strong leadership. CEO Robert
Donald 's innovations and market savvy have consistently propelled P&G. Business Week
plains that from its Swifter mop to battery-powered Crest SpinBrush toothbrushes and Whitestrip tooth whiteners, P&G
outshined its peers. Since assuming the CEO job, McDonald has guided P&G to successive increases in sales, income,
d cash flows. Such increases have driven impressive gains in stock price as evident from the graph below:
Still, we know that forecasts of financial performance drive stock price. Historical financial statements are relevant to the
ent that they provide information useful to forecast financial performance. Accordingly, considerable emphasis is placed
generating reliable forecasts.
(continued on next page)
11-2
(continued from previous page)
Module 11 I Forecasting Financial Statements
the preceding statement(s). For example, we update retained earnings on the balance sheet
fleet our forecast of the company 's net income . And , the forecasted income statement and
ce sheets are used in preparing forecasts for the statement of cash flows, which follow s the
process described in Module 2 for preparing the historical statement of cash flows.
erview of Forecasting Process

ore we focus on the mechanics of forecasting , we take a moment to consider some overarching
iples that guide us in the forecasting process.
rmulated (Adjusted) Financial Statements

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
This module explains the forecasting process, including the forecasting of the income statement, the balance sheet, Bild
the statement of cash flows. From all accounts, the rebound in P&G's stock price following the market melt-down of 2009
reflects optimism about its future financial performance and condition.
Sources: Procter & Gamble 2011 10-K and Annual Report; Business Week, April 2006; Barron 's, November 2006; Forbes, 2011 .
0 3:
l3 0
C>
Forecasting Financial Statements
J> c
z r-
-N m
J>
-t
Forecasting the Income

Statement
Revenue Growth
Forecasting the
Balance Sheet
Operating Expenses
Nonoperating
Expenses
Operating and
Nonoperating Assets
Operating and
Nonoperating
Liabilities
Forecasting the
Statement of Cash Flows
Issues
Operating Activities
Investing Activities
Sensitivity Tests
Multiyear Forecasting
Financing Activities
Parsimonious Method
Multiyear Forecasting
Equity
Forecasting financial performance is integral to a variety of business decisions ranging from

investing to managing a company effectively. We might , for example, wish to value a com~a
ny's common stock before purchasing its shares. To that end, we might use one of the ~al~at10n
models we discuss in later modules that rely on financial statement forecasts as a crucial mput.
Or we might be interested in evaluating the creditworthiness of a prospective borrower. In that
ca~e we forecast the borrower's cash flows to estimate its ability to repay its obligations . We
might also be interested in evaluating alternative strategic investment dec~si~ns. In this case,
we can use our forecasts to evaluate the shareholder value that the strategic mvestment alternatives will create. All of these decisions require accura.te financial forecasts. In this moduled
we illustrate the most common method to forecast the mcome statement, balance sheet, an
statement of cash flows.
FORECASTING PROCESS
L01 Explain the
process of forecasting
financial statements.
11 -3
The forecasting process estimates future income statements, balance sheets, and statements. of
cash flows, in that order. The reason for this ordering is that each statement uses informauon
forecasting process begins with a retrospective analysis. That is , we analyze current and
or years' statements to be sure that they accurately reflect the company 's financial condition
performance. [f we believe that they do not, we adjust those statements to reflect the comy's net operating assets and the operating income that we expect to persist into the future.
ce we've adjusted the historical results, we are ready to forecast future results . Why would we
to adj~st hi~torical results? The answer resides in the fact that financial statements prepared
conformity with GAAP do not always accurately reflect the "true" financial condition and
ormance of the company. This adjusting process , also referred to as recasting or reformulat(or scrubbing the numbers), is not " black and white ." It requires judgment and estimation .
atedly in earlier modules , we have explained estimation, accounting choice, deliberate
agerial i~tervention in reporting , and transitory versus persistent items. These concepts are
gral to adjustments we make to financial statements. It is important to distinguish between the
ses of GAAP-based financial statements and the adjusting process for purposes of forecast. Specifically, GAAP-based statements provide more than just information for forecastino-. For
ample, financial statements are key inputs into contracts among business parties. This ~eans
t historical resu lts , including any transitory activities, must be reported to meet manao-ement's
uciary responsibilities. On the other hand, to forecast future performance, we need ~o create
~t of financial statements that focus on those items that we expect to persist, with a special
phasis on persistent operating activities .
rbage-ln , Garbage-Out
l forecasts are based on a set of forecasting assumptions. For example, to forecast the income
tement, we must make assumptions about revenue growth and other assumptions about how
penses will change in relation to changes in revenues. Then , to forecast the balance sheet, we
e assumptions about the relation between balance sheet accounts and changes in revenues.
nsequently, before we make business decisions based on forecasted financial statements, we
ust understand and agree with the underlying assumptions used to produce them. The old adage ,
arbage-in, garbage-out," is apt. That is, the quality of our decision is only as good as the qualof the information on which it is based . We must be sure that our forecasting assumptions are
nsistent with our beliefs and predictions for future growth and key financial relations.
ptimism vs Conservatism
any people believe that it is appropriate to be overly conservative in their financial forecasts so
to minimize the likelihood of making a bad decision. "Let's be conservative in our forecasts
that we are certain our forecast will be met" is a frequent prelude to the forecasting process.
lthough this approach might appear reasonable , being too conservative can result in missed
al~a~le_ opportunities that, in the end, can be very costly. Instead , our objective is not to be overly
lim1stic or overly conservative . The objective for forecasting is accuracy.
omputing forecasts out to the "nth decimal place" is easy using spreadsheets. This increased
ecision makes the resulting forecasts appear more "professional ," but not necessarily more
curate. As we discuss in this module , our financial statement forecasts are highly dependent on
r ~eve.n.ues forecast. Whether revenues are expected to grow by 4% or 5% can markedly impact
of1tab1hty and other forecasts . Estimating cost of goods sold and other items to the nth decimal
11-4
11 -5
pl ace is meaningless if we have im precise revenue fo recasts. Consequently, borderline d ..

that depe nd o n a hig h level of fo recasting precision are probabl y ill -advised .
eci
Smell Test
At the e nd of the forecas ting process, we must step back and make sure that the nu rnbe
predict pass the smell test. T hat i , we need to as ess whether our forecasts are reason bl rs
they make eco.no mic sense, do they fit wi th the underl ying relatio ns that d rive fi nanc ial f~ree
For example, 1f our fo reca ts are dependent on increas ing se lling pri ces, it is wise to ex
1
. .
.
Pore
l 1.k e Iy consequences o f a pnce
mcrease. Co mpame
cannot ra ise pri ces witho ut a conseque
of demand unless the product in question is protected in some way fro m competitive attacknt
fo recasts mu st appear reasonable and consistent wi th bas ic busines economics .
s. O.W
Internal Consistency
The fo recasted ~nco~e st.atem~nt , balance sheet, and statement of ca h flows are linked in the
same way th at h1ston cal f111anc1al stateme nt are. That is , they must art icul ate (li nk together L
w1,,...
111 an acros~ tun ~) as we ex pl ain in Modul e 2 . Preparing. a forecas te? stateme nt ~f cash floWs,
a lthoug h tedio us, 1s often a useful way to uncover fo recastmg assumpti ons that are mconsist ti
a~~lied across fi nanc ial tatements (exampl es are CA PEX, deprec iati on, debt payments~~
d1V1dends). If the foreca ted cas h balance on the ba lance sheet agrees with that on the statem
of ca h flows, it is likely that our incom~ statem~nt and balance sheet art ic ul ate properly.~~
a l ~ must ensure that our fo recast assumptio ns are mternall y consistent. It is nonsense to fo recast
an mcreased gross profit margi n during an economic recess ion unles we can make compellin
arguments based on econo mi cs .
g
Crucial Forecasting Assumptions

Anal ysts commonl y perform sensiti vi ty analyses fo ll owin g preparation of the ir forecast . This
entail increasing and decreas ing the fo recast as umpti ons to identify those assumptions that have
the g rea~est i~pact. By " i ~pact," we mean large enough to alter bu iness decisions . As umptions
that are 1dent1fied as crucia l to a decisio n must be investigated thoroughly to ensure that forecast
assumpti on are as accurate as possi ble.
Summary of Forecasting Process

Some professiona ls assert that fo reca ting is mo re art than science. Whatever it is, it must begin
with a bu iness analys is, including an as es ment of general econo mic acti vity and the competiti ve fo rces within the broader business environment that we di cuss in Module J. Ideally, forecasts should be develo ped at an indi vidual-product level and consider competiti ve advantage,
trends in manufacturing costs, log istical requirements, necessary marketing support, after-sale
custo mer service, and so fo rth . The narrower the foc us, the more we can focus on the business
environment in which the company operates and the mo re info rmed o ur fo recasts are . Unfortunately, a external users of fi nancial stateme nts, we o nl y have access to gene ral- purpose financial
statements, whi ch we adju t as we see fi t , given publicly ava ilabl e info rmation and our own
as ess me nts. Then, we formul ate fo recast assumpti ons that are reasonable and consistent with the
econo mi c rea lities defining that company.
All-Important Revenues Forecast

The revenues (sale ) fo recast is , arguably, the most cruc ia l and di ffic ult estimate in the forecas ti ng
process. It is a cruc ial estimate because other income statement and ba lance sheet accounts derive,
either directly or indirectly, fro m the revenue fo recast. As a result , both the income statement and
bal ance sheet grow. with increa es in reve nues. The income statement refl ects th is 011rowth concurrentl y. However, diffe rent balance sheet accounts refl ect revenue growth in di ffe rent ways. Some
balance heet accounts antic ipate (or lead) revenue gro wth (invento ries are one example). Some
accounts reflect thi s g rowth concurrently (acco unts receivable). And some acco unts reflect reve nue growth with a lag (for example, companie usually expand plant assets only after growth is
deemed sustainable) . Conversely, when revenue decline, so do the income statement and balance
as the company shrinks to cope with adversity. Such actio ns include reducti on of overhead
and di vestiture of excess assets. Ex hibit 11.l hi ghlig hts cruc ial relati ons that are impacted
revenues forecast fo r both the income statement and the balance sheet.
-
EXHIBIT 11.1
Income Statement and Balance Sheet Accounts

Directly Impacted by the Revenues Forecast
Sales
-- - - -- - -,
Cash
Cost of goods sold ~---:::::J.....": Rever1IJee ' "'----- , Accounts receivable
Operating expenses
, _ ~~~ _.,- .~-~ Inventories
Income before tax
Tax expense
Net income
aucially
impacts ...
Prepaid expenses
PPE
Accounts payable
Accrued liabilities
Other short- and
long-term operating
assets and liabilities
amics of Income Statement {and Balance Sheet) Growth

following accounts are impacted directly, and with a relati vely short lead o r lag time, by the
nues forecast (for convenience, our discussion assumes an increase in revenues):
Cost of goods sold are impacted via increased in ventory purchases, added manufac turin g
personnel, and greater depreciation fro m new manufacturing PPE.
Operating expenses increase concurrentl y with , or in anti cipatio n of, increased revenues;
these expenses inc lude increased costs fo r buyers, hi gher ad verti sing cost , payments to sa le
personnel, costs of after-sale custo mer support , logistics costs, and admini strati ve costs.
Cash increase and decrea es di rectl y with increases in reve nues as rece ivabl es are co llected
and as payables and accruals are paid .
Accounts receivable increase directl y with inc reases in revenues as more products and services are sold on credit.
Inventories no rmall y increase in anti cipatio n of highe r sales volume to en ure a suffic ient
stock of in ventory avail able fo r sa le.
Prepaid expenses increase with increases in advertising and other ex penditures made in
antic ipatio n of hi ghe r sa les.
PPE assets are usually acquired once the revenues increase is deemed susta inable and the
capacity constraint is reached; thus, PPE assets increa e with increased revenue, but with a lag.
Accounts payable increase as additional inventories are purchased on credit.
Accrued liabilities increase concurrent with increases in revenue-dri ven operating ex penses .
Other operating assets and liabilities such as deferred revenues, deferred taxes, and pension , increase and decrease concurrent with revenues.
namics of Balance Sheet Growth

o understand the dynamics of growth in the balance sheet, it is useful to view it in three sections
depicted in Exhibit l J .2. Each of these sections experience growth at different rates. As evident
m Exhibit 11 . l , most net operating assets grow roughly concurrently with increases in revenues.
s net operating assets are normall y positi ve, the asset side of the balance sheet grows faster than
e li ability side, in dollar terms . This creates an imbalance that must be managed by the company's
fi nance and treasury di vi ions.
1 1-6
11-7

I
i EXHIBIT 11 .2
e SEC .1 We also benefitted from conversations with Ruma Mukerji, one of the authors of
rgan Stanley research report, and we are grateful for the background information that she
us for the discussion of the forecasting process in this module. We begin our discussion
plaining forecasting of the income statement. P&G's income statement is reproduced in
't l l .3 as a reference point.
Dynamics of Balance Sheet Growth
Marketable securities
Short-term debt
Cash
Accounts receivable
Inventories
Accounts payable
Accrued liabilities
Long-term operating liabilities
PPE
Procter & Gamble Income Statement
Other long-term operating assets

Long-term debt
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Total assets
Financing Section
(longer term)
Total liabilities and equity
The "buffer zone" represents that section of the balance sheet that responds to short- and intenne..
diate-term imbalances. Cash declines as other o~erating assets increase,_ and comp~nies typically
finance that cash decline with short-term borrowings such as a seasonal lme of credit from a bank.
Conversely, companjes typically invest excess cash in marketable securities (also titled short-term
investments) to provide liquidity to meet future operating needs, investment opporturuties, and
similar near-term demands . Comparues manage the "financing section" of the balance sheet on a
long-term basis to provide funding for relatively permanent increases in net assets, such as PPE
or even the acquisition of other companies. Further, income is reinvested in the business, longterm debt is borrowed, and equity securities are sold in proportions that are necessary to maintain
the desired financial leverage for the company. Although the cash reinvestment deci sion is made
continually, increases in long-term debt and equity occur relatively infrequently to meet longerterm funding needs. If the store of liquidity in the buffer zone is not needed for the foreseeable
future, it can be used to retire long-term debt or to repurchase the company's outstanding shares.
Dynamics of Statement of Cash Flows Growth

The dynamics of the statement of cash flows mimic the dynamics of the income statement and
balance sheet. This is because the statement of cash flows is prepared using both the income
statement and balance sheet. Specifically, once we have forecasts of the income statement and
balance sheet, we can compute the forecasted statement of cash flows just as we would its historical counterpart.
Identifying the Forecasting Steps

We apply the forecasting process in a four-step sequence:
1. Forecast revenues.
2. Forecast operating and nonoperating expenses. We assume a relation between revenue
and each specific expense account.
3. Forecast operating and nonoperating assets, liabilities and equity. We assume a relation
between revenue and each specific balance sheet account.
4. Adjust short-term investments or short-term debt to balance the balance sheet. We use
marketable securities and short-term debt to balance the balance sheet. We then recompute
net nonoperating expense (interest/dividend income or interest expense) to reflect any adjustments we make to nonoperating asset and liability account balances.
Morgan Stanley Research Report

We illustrate the forecasting process using Procter & Gamble and an actual research rep~rt
(along with an accompanying analysis spreadsheet) prepared by Morgan Stanley analysts 10
August 2011, will ch coincides with P&G 's August 10 filing of its fiscal year 2011 annual report
2011
2010
2009
products sold .. . . . .. . ... . . .. .... . .. .. . .... .. .. . . . ... . ..

, general and administrative expense ... . ........ . ..... . .. ... .
$82,559
40,768
25,973
$78,938
37,919
24,998
$76,694
38,690
22,630
ng income . ... . . . .. .. ... ... . . ... . .. . . . ... .. .. .......... .
15,818
16,021
15,374
expense ... . .. . . . . ..... . . . . .. . . . . ... .... . . .. .. . ... . . . . .

nonoperating income, net ... . . . . . . . .. . . ... ... . . . ... ... .. ..
831
202
946
(28)
1,358
397
s from continuing operations before income taxes ..... ... . . ... .
15, 189
15,047
14,413
taxes on continuing operations . .. . .. . .. . .. . . ... ..... . .. .. . .
3,392
4,101
3,733
ings from continuing operations . . . .. . .. ... . ......... .... ..
11,797
10,946
---
10,680
1,790
2,756
$12,736
$13,436
---
mings from discontinued operations .. . .. . . . . .. . . .. . . .. .. . ... .

$11,797
$
net earnings per common share ... ... . . . . . . ... . . .... . .. . . .
4.12
4.32
$ 3.93
4.11
1.80
1.97
4.49
4.26
1.64
EP 1: FORECASTING REVENUES
casting revenues is the most difficult and crucial step in the forecasting process. Further,
y of the remaining income statement and the balance sheet accounts are forecasted based on
assumed relation with forecasted revenues. We typically utilize both financial and nonfinancial
ormation in developing forecasts. Each account must be separately analyzed using all relevant
ancia1 and nonfinancial information, including the insights gained from earlier modules of this
k.
To forecast revenues, then, we want to use all available, relevant information. But deciding
hat information is relevant and determining how to use the information varies across forecast. As well, the level of information itself can vary across forecasters. For example, if we have
ess to inside information and we are developing forecasts as part of the strategic budgeting
ess for a company, we might have access to data regarding the competitive landscape, caner trends and disposable income, new product introductions, production and marketing plans,
d many other types of inside information. In this case, we can build our revenues forecast
m the bottom up with unit sales and unit prices for each product or service sold. However, if
e are a company outsider, we have much less information. In this case, we must rely on public
tements by company management in conference calls and meetings in addition to the inforation disclosed in the management discussion and analysis (MD&A) section of the 10-K and
e growth of individual product lines from segment disclosures . We also use publicly available
ormation from competitors, suppliers, and customers for additional insight into broader trends
Copyright 2011 Morgan Stanley. Please note that materials that are referenced comprise excerpts from research reports
d should not be relied on as investment advice. This material is only as current as the publication date of the underly.8 Morgan Stanley research. For important disclosures, stock price charts and equity rating histories regarding compaes that are the subject of the underlying Morgan Stanley research , see www.morganstanley.com/researchdisclos ures.
dditi onally, Morgan Stanley has provided their materials here as a courtesy. Therefore, Morgan Stanley and Cambridge
usiness Publishers do not undertake to advise you of changes in the opinions or information set forth in these materials.
L02 Forecast
revenues and the
income statement.
11-8
11-9
that can impact future revenues. Companies often provide " guida~ce" to ~utsiders to help refine
usua lly valuable as companies have a vested interest m correct
. h 1s
forecasts w h 1c
b forecasts SO
that their' securities are accurately priced. Generally, the revenues forecast is o tamed from the
following formula:
Pro forma results do not include any anticipated cost savings or other effects of the planned integration of Gillette. Accordingly, such amounts are not necessarily indicative of the results if the
acquisition had occurred on the dates indicated or that may result in the future.
Forecasted revenues = Actual revenues x (1 + Revenue growth rate)

The revenue growth rate can be either positive or negative de~end_ing ~n. numerous c~mpany and
f t
d scribed above The remainder of this section identifies and explams key faceconom1c ac ors , e
.
. .
p t & Gamble
tors that impact revenue growth and illustrates their application to roe er
.
Factors Impacting Revenue Growth

Forecasts are mad e w1"th"m the broader context of the general economic environment
f f and the
wh"
i
ch
the
company
operates.
There
are
a
number
of
spec1
1c actors that
compet1t1ve 1an scape m
impact a company's revenue growth.
t 1ons When one company acquires another, the revenues
andd expenses
Impact o f A cqws1
(
d" of
d company are consol"idated but only from the
we 1scuss
. date of acqu1s1t1on
. , onwar
.
the acquire
Mo d u le 9) Acquisitions can 0crreatly impact the acqutrer

sf income
statement,
conso I1'd at1on
m
1
p
es ecially if the acquisition occurs toward the beginning_ of the acqu1rer s 1~ca year. rocter
tion of Gi"llette in October 2005 provides an example. In
& pGamb Ie ,s acqu1s1
its) June
P&G30, 2006,
fiscal year-end income statement (ending eight months following the acqu1s1t1on ,
reported
the following for sales:
Years ended June 30 ($ millions)
Net sales ...... .. . . .. . . ... . ... .
2006
2005
$68,222
$56,741
$51,407
The following table provides pro forma results of operations for the years ended June 30, 2~0~,
2005 , and 2004, as if Gillette had been acquired as of the beginning of each fiscal year presen e
Net sales (in millions) . ... .... . . . . . . .. .

Net earnings (in mil lions) .. .... . .. .. . .
Di luted net earnings per common share . .. . . . .
2008
2005
2004
$71,005
8,871
2. 51
$67,920
8,522
2.29
$61,112
7,504
1.98
Discontinued Operatio ns In October 2009, the Company completed the divestiture of our global
pharmaceuticals business to Warner Chilcott pie for $2.8 billion of cash, net of assumed and transferred liabilities . . . . The Company recorded an after-tax gain on the transaction of $1,464, which .
is included in net earnings from discontinued operations in the Consolidated Statement of Earnings
for the year ended June 30, 2010 .. .
In November 2008, the Company completed the divestiture of our coffee business through
the merger of our Folgers coffee subsidiary into The J.M. Smucker Company . .. . The Company
recorded an after-tax gain on the transaction of $2,011 , which is included in net earnings from
discontinued operations in the Consolidated Statement of Earnings for the year ended June 30,
2009 ....
Following is selected financial information included in net earnings from discontinued operations for the pharmaceuticals and coffee businesses:
These net sales amounts include G illette product sales fro m Oct?ber 2005 onwa~d (f~r ~:~~
2006) and none of Gillette's sales are reported in fiscal 2005 or fiscal 2004. P&G s 20 Id h
growth of 20.2% ([$68 ,222/$56 ,74~] -1) was n_ot P&G's organic growth, and we wou
ave
been remiss in forecasting a 20.2% increase for ~1 sca_I 2007.
.
.
e
Importantly until all of the three comparative income statements m the 10-K me!~:~ th
acquired compa~y the acquirer is required to disclose what revenue and net inco~e wou
av~
been had the acq~ired company been consolidated for all three _years reported m the ~:~s
income statemen t . Th"s
disclosure. Procter & Ga
1 "what if' disclosure is called proforma
.
pro forma disclosure in 2006 includes the following discussion and table:
Pro forma results; Years ended June 30
act of Divestitures Companies are required to exclude sales and expenses of discontinued
rations from the continuing operations portion of their income statements, and to present the
income and gain (loss) on sale of the divested entity, net of tax, below income from continuoperations (we discuss accounting for divestitures in Module 5 and Module 9). Procter &
mble 's income statement in Exhibit l l .3 reports net earnings from discontinued operations of
,790 million and $2,756 million for fiscal years 2010 and 2009 , respectively. The following
tnote from PG's 201J 10-K provides information about these two discontinued operations:
sa Ies f o~62006
as
Using this disclosure, we would have been able to compute the growth rate m
as our
ed as
4 _5 % ([$ 7 I ,005/$67 ,920] -1), and we would have used the proforma net sales for 20
forecastincr base That is , we would have forecasted 2007 net sales as $74 ,200 (~a!cula~imate
$7 1,005 .; l.04S) . P&G was carefu l to point out, however, that the pro forma earnings es
must be viewed with caution:
Ii'
"8r ended June 30 ($ millions)
2010
Pharma
Net sales ... .. .. .. . ... . .... ........ . . . $ 751

Earnings from discontinued operations .... .
Income tax expense . . . . ... . . . .. .. . .. . . .
Gain on sale of discontinued operations ....
Income tax benefit (expense) on sale . . . . . ..
306
(101)
2,632
(1,047)
Net earnings from discontinued operations . . $1,790
2009
Coffee
Total
Pharma
$-
$ 751
$2,335
306
(101)
2,632
(1,047)
$1 ,790
912
(299)
$ 613
Coffee
Total
$ 668
$3,003
212
(80)
1,896
115
1,124
(379)
1,896
115
2,143
2,756
--
The net gain on the sale of the pharmaceuticals business, in the table above, for the year ended
June 30, 2010, also includes an after-tax gain on the sale of the Actonel brand in Japan which
occurred prior to the divestiture to Warner Chilcott.
e revenues, expenses , and earnings for Procter & Gamble in fiscal years 2010 and 2009, as
ported in its income statement, exclude the revenues, expenses, and earnings from its discontind operations. The detail relating to the revenues , expenses, and earnings of discontinued operaons (and their gain on sale) is reported in the footnote disclosure shown above. This additional
formation allows us to better evaluate the drivers of observed growth of revenues and earnings,
d we would be remiss if we included the revenues and gains relating to discontinued operations
our forecasts.
pact of Existing vs New Store Growth Retailers typically derive revenue growth from two
urces: (1) from existing stores (organic growth), and (2) from new stores . We are interested in
e breakdown between these two growth sources as the latter is obtained at considerably more
st. Target Corporation provides the following footnote disclosure to its 10-K report.
11-1 o
11-11
~et Sales Fisc.al years 2010, 2009 and 2008 each spanned 52 weeks. An additional week is
included 1n the first fiscal quarter approximately every six years to realign fiscal quarters with c 1 d
quarters.
a en ar
Percent Change
2010
2009
2008
Sales .. ....... .. .... . .. .... ... . ...

Cost of sales .. . . . . . .. ... . ... .. .... .
$65,786
45,725
$63,435
44,062
$62 ,884
44,157
Gross margin ..... ... . . .. . ..... . . ..

SG&A expenses . .. .. . ..... . .... . ...
20,061
13,367
19,373
12,989
EBITDA . . ... ... ......... . ...... . . .

Depreciation and amortization ... ..... .
6,694
2,065
Retail Segment Results (millions)
EBIT . ... .... . .. .. ... . ...... . . ....
2010/2009 2009/
3.7%
3.8
0.9%
(0.2)
18,727
12,838
3.5
2.9
3.5
1.2
---
6,384
2,008
---
5,889
1,808
4.9
2.8
8.4
11 .0
$ 4,629
$ 4,376
$ 4,081
Retail Segment Results (millions)

Drivers of changes in comparable-store sales:
Number of transactions ....... . ...... .... ............ .
Average transaction amount .. .. . ....... ...... ....... . . .
Units per transaction . .. . .. .. . . .... . ...... . .. . . .. . .. .
Selling price per unit .. . . . .. . .. . .. . ..... . . . . . . .. . . . . .
---
2010
2.0%
0.1%
2.5%
(2.3)%
5.8%
2009
(0.2)%
(2.3)%
(1 .5)%
(0.8)%
The folio.wing table summarizes net sales and Mac unit sales by operating segment and net
sales and . unit sales by product during the three years ended September 2 5 , 2010 (in millions
except unit sales 1n thousands and per unit amounts):
'
2010
7.3%
2008
(3.1)%
0.2%
(2.1)%
2.3%
Total Mac unit sales . .. . ... . .. . . ..
$ 4,324
9,535
(23)%
9%
$ 5,622
8,732
26%
2%
23 %
93%
NM
23 %
7%
13,859
8,091
4,036
13,033
0
1,475
2,411
(3)%
(12)%
21%
93%
NM
(13)%
9%
14,354
9,153
3,340
6,742
0
1,694
2,208
45 %
25%
13,662
31 %
(4)%
iPod unit sales . .... . . . . .. . . ....... . ... . .
(7)%
50,312
---
iPhone units sold . ... ....... .. . . . ........

iPad units sold . . . . . . .. . . . .. .... . . . ......
Our fiscal year ends on the Saturday nearest January 31 . Unless otherwise stated , references to
years in this report relate to fiscal years, rather than to calendar years. Fiscal year 2010 ended
January 29, 2011 , and consisted of 52 weeks. Fiscal year 2009 ended January 30, 2010, and consisted of 52 weeks. Fiscal year 2008 ended January 31, 2009 , and consisted of 52 weeks.
43%
18%
Net sales per Mac unit sold ...... . . . ....... $ 1,279
Net sales per iPod unit sold .... .. . .. . . .. . .. $
the week rather than on a constant date. Target has the following fiscal year-end policy:
2008
4,627
9,035
---
1. Retailers typically operate on a 52/53 week year, closing their books on a particular day of
Change
52%
Unit sales by product

Desktops ..... . . . ..... . . .... . ... .. .. ..
Portables . ... . ... . . . .. . . . . . .. . . .. . ... .
At least three points in Target's footnote di sclosure are noteworthy for forecasting purposes .
2009
Total net sales ........ .. ....... . . . ..... $65,225
---
Total sales for the Retail Segment for 2010 were $65,786 million, compared with $63,435 million in
2009 and $62 ,884 million in 2008. All periods were 52-week years. Growth in total sales between
2010 and 2009 resulted from higher comparable-store sales and additional stores opened , whereas between 2009 and 2008, growth in total sales resulted from sales from additional stores opened,
partially offset by lower comparable-store sales.
Change
Net sales by product

Desktops ........ . . . .... . ....... ... . . . $ 6,201
Portables ... . ... . . ... . . . . . ... .. ... . ... 11 ,278
Total Mac net sales .. . .. .. . .... . . ... . ... 17,479
iPod . .. ..... . .. . ........... . . . . .......
8,274
Other music related products and services .. ..
4,948
iPhone and related products and services . . ... 25,179
iPad and related products and services ... .. . .
4,958
Peripherals and otherhardware . .. . . . . .. . ...
1,814
Software, service, and other sales ... . . ... ...
2,573
10%
39,989
93%
7,458
NM
---
$42,905
14%
$37,491
3,182
7,214
(14)%
20%
3,712
6,003
10,396
7%
-----
---
(10)%
54,132
(1)%
$ 1,478
54,828
---
149
(11)%
20,731
78 %
---
9,715
---
$ 1,333
---
164
---
---
167
11,627
--0
NM
m Apple 's disclosure we can derive several useful insights for forecasting purposes.
On average, a Mac_sells for $ 1,279 and the per unit selling price has decreased during the
~ h
past three years; unit sales, however have increased by 3 1% and 7o/r.
years.
'
o per year or t e past two
Target's sales for fiscal years 2008, 2009 , and 2010 are all on a comparable 52-week year.
Should a fiscal year include a 53-week year (as Target reported in 2006) , the extra week's sales
will make it appear as if sales are growing at a higher rate than they are . To accurately forecast
revenue growth, we must use numbers and rates that reflect a consistent 52-week period each
year. To do thi s, we assume that sales are recorded evenly each week and we adjust revenues
for the 53-week year by multiplying reported sales by 52/53. We then use the adjusted 52-week
proforma sales to compute growth rates .
2. More than 43 % ([3.7 % - 2. 1%]/3.7% = 43.2%) of Target's 20JO sales growth is attributable
to new store openings.
3. The average per store planned capital expenditure is about $44 million ($574 million reported
CAPEX for new stores/13 new stores opened in 2010 as reported in the 2011 MD&A).
Although acquired growth provides the organic growth of the future, it comes at considerable
cost per store .
Impact of Unit Sales and Price Disclosures Forecasts that are built from anticipated unit
sales and current prices are generally more informative, and accurate, than those deri ved fro m
historical dollar sales. Most companies, however, do not provide unit sales data in their IO-Ks.
Apple, Inc., is an exception, and the following footnote disclosure from its 10-K provides useful
information (like Target, Apple operates on a 52/53 week fiscal year):
The iP~~ unfit sales are decreasi ng over the past two years, probably reflecting increased
compet1t1on rom other MP3 players and market saturation .
~g~ ~verage sales price of iPods in 20 JO is $ 164, JO% hi gher than the average sales price in
~Phone unit sales are 39,989 thousand, up 93 % from 2009 and 244% from 2008 .
~Phone dollar sales are $25,179 million in 20 JO , 93 % higher than 2009 and 273 % greater than
Jn
2008.
Apple h~s only begun to realize the effects of its iPad as of fiscal year 20 JO with 7 458 th
sand units sold and total revenues of about $4,958 million.
'
'
ou-
tthaile~ dislclosures su_ch as _A pple's allow us to prepare more informed forecasts that consider
unit sa es and sellrng pnces.
orecasting Revenue Growth

o illustrate the forecasting process, we forecast revenue growth "or
P&G o "
1
'
cl d
bl' d' 1
ur m1ormat1on
e u es pu ,1c isc _osures .by m_anagement in meetings and conference calls with analysts and
M;ompany ~ published fmanc1al _reports including the management di scussion and analysis
&A) section of the JO-K. We discuss the information in each of these sources .
11-12
11-13
Module 11 I Forecasting Financial St atements
Public Disclosures via Meetings and Calls P&~ hel.d its first meetin? w i t~ analysts on sei>-i
tember 8 , 20 11, fo llowi ng the August 10 re lease of its. f1s~~l ye~r 2011 fma,nc1al st~tements. 1
presentation (public ly avail able o n the " Investor Re l ati on ~ sect10n of P&G s Website) provides
ouidance in several areas that impact our fo recasts and we include excerpts fro m that presentation
0
in o ur di scussio n below.
Published Reports: Segment Disclosures and MD&A Co mpani ~s are .requi r~d to disclose
summary fi na ncia l results fo r each of the ir o perating segments alo ng with a d1 scuss1on and ana)y.
s is of each . (An o pe rating segme nt is defin ed unde r G A A P as a compo ne nt of the c.ompany for
w hi ch fi na nc ial info rmatio n is available and di sclosed to senior manageme nt.) P&G is organized
into six o perating segments as di scussed in the fo llow in g excerpt fro m its 20 11 MD&A:
O ur organ izational structure is comprised of t w o Global Business Units (GB Us), Global O perations,
Global Business S e rvices (GBS) and Corporate Functions (CF) . . . Effective February 2011 , our
two GBUs are Beauty & Grooming and Household Care. The primary responsibility of the GBUs is
11-14
's total sales volume increased by 6% in 2011 , or 5% excl udi ng acquis itions and divestitures.
enues increased by 5% in total as a result of increases in units of product sold (altho ugh marked
ation is evident across products) and 1% as a result of price increases . Revenues decl ined , how' as a result of changes in product mix (generally relating to an increase in the relati ve percentof lower-priced products) . This volume/price/mix analys is is pote ntially important as we are
n more comfo rtable with revenue increases resulting fro m increased units sold than fro m price
ases that mig ht be unsustainable.
Although fluctuatio ns in fo re ig n-exchange rates affected indi vidual product categories in
11, the net effects on total revenues were largely offsetting in 2011 (see Modul e 5 fo r a di scusn of fore ign-exchange rate effects o n sales) . By comparison, however, during 200 8 , the $US
ened vis-a-vis o ther major world c urrencies. T hus, revenues deno minated in fo reig n currens, including P&G 's, inc reased w hen translated into $US, resulting in an inc rease in revenue
wth of abo ut 5% . We must be aware of these foreign exchange fluctuatio ns as reported fluctuans in revenues might not refl ect unde rl ying fl uctuati ons in unit volumes.
to develop the overall strategy for our brands . . . Under U .S . GAAP, the business units c o_mpns1ng
termining the Revenue Growt h Forecast
the GBUs are aggregated into six reportable segments: Beauty; Grooming ; Health Care, Snacks
and Pet care ; Fabric Care and Home Care; and Baby Care and Family Care.
Reportable
Segment
Beauty
Grooming
Health Care
% of Net % of Net
Sales* Earnings*
24 %
Cosmet ics, Female Antiperspirant and

Deodorant, Female Personal Cleansing,
Female Shave Care, Hair Care, Hai r Color,
Hair Styling, Pharmacy Channel, Prest ige
Products, Salon Professional, Skin Care
Head & Shoulders,

Olay, Pantene,
Well a
9%
14 %
Electronic Hair Removal Devices, Home Small

Appliances, Male Blades and Razors, Male
Personal Care
Braun, Fusion,
Gillette, Mach3
Snacks and
Pet Care
4%
Fabric Care
and Home
Care
30 %
Baby Care and

Family Care
Billion-Dollar
Brands
Categories
24 %
14 %
19%
16%
2%
27 %
17 %
we saw, P&G di saggregated the sales g rowth for each busi ness segme nt into volume, fo reig n
change , price, and mi x effects. Mo rgan Stanley ana lysts fo recast each of those factors fo r each
P&G 's segme nts to o bta in a n aggregate forecast of sales . To illustrate , fo llowing is an excerpt
m the Morgan S ta nley fo recast spreadsheet fo r P&G 's total sales and fo r its Beauty segme nt
e spreadsheet has similar fo recasts fo r each segme nt) .
Feminine Care, Gastroi ntestinal, Incontinence,

Rapid Diagnostics, Respiratory, Toothbrush,
Toothpaste, Water Filtration, Other Oral Care
Always, Oral-B,
Crest
Pet Care, Snacks
lams, Pringles
Laundry Additives, Air Care, Batteries, Dish

Care, Fabric Enhancers, Laundry Detergents,
Surface Care
Baby Wipes, Di apers, Paper Towels, Tissue,
Toilet Paper
Ace, Ariel, Dawn,

Downy, Duracell,
Febreze, Gain, Tide
FY2007
FY2008
FY2009
FY2010
Sep-10
Dec-10
Mar-11
Jun-11
FY2011
Sep-11 E
Dec-11 E
Mar-12 E
J un -12 E
FY2012E
76,476.0
81 ,748.0
76,694.0
78,938.0
20,122.0
21 ,347.0
20,230.0
20,860.0
82,559.0
21 ,555.2
22,136.4
20,843.3
21 ,786.9
86,321 .8
Organic Sales Growth
6.0%
5.0%
2.0%
3.4%
4.0%
3.0%
4.0%
5.0%
4.0%
3.4%
4.9%
4.8%
4.6%
4.4%
Volume (Organic)
5.0%
5.0%
-2.0%
4.0%
7.0%
6.0%
5.0%
3.0%
5.2%
1.3%
2.8%
2.8%
4.1%
2.8%
Pricing
1.0%
1.0%
5.0%
0.5%
1.0%
0.0%
1.0%
3.0%
0.4%
3.7%
3.6%
3.7%
2.0%
3.2%
Mix
0.0%
-1.0%
-1 .0%
-1.1%
-2.0%
-2.0%
-2.0%
-1.0%
-1.6%
-1.5%
-1.5%
-1.5%
-1.5%
-1.5%
0.1%
FX Impact
2.0%
5.0%
-4.0%
-0.4%
-3.0%
-2.0%
1.0%
5.0%
0.2%
3.8%
-1.2%
1.8%
0.0%
Acq/Oiv
4.0%
-1.0%
-0.8%
-0.1%
0.6%
0.0%
0.0%
0.0%
0.3%
0.0%
0.0%
0.0%
0.0%
0.0%
12.1 %
9.2%
-2.8%
2.9%
1.6%
1.5%
5.5%
10.2%
4.6%
7. 1%
3.7%
3.0%
4.4%
4.6%
17 ,889.0
% Sales Growth
Bounty, Charmin,
Pampers
Bea uty Care
Percent of net sales and net earnings from continuing operations for the year ended June 30, 2011 (excluding
results held in Corporate).
P&G also reports a revenue history for each segment and its MD&A pr?vides additi_onal irif?rm:~
tio n relating to the breakdown of revenue inc reases for the cun:ent year mto the poi:1on relatmgn _
increases in unit volume sales, increases in prices, effects of fore1gn-curre nc.y translatio n , _a nd cha _g
es in product mi x. That disclosure and related discuss io n allow us to compile the following table.
19,515.0
18,924.0
19,491 .0
4,929.0
5,290.0
4,870.0
5,068.0
20,157.0
5,259.0
5,423.1
4,965.3
5,296.1
20,943.4
4.0%
1.0%
3.2%
2.0%
3.0%
4.0%
3.0%
3.0%
3.5%
3.5%
3.5%
4.5%
3.8%
Volume (Organic)
2.8%
-1.0%
3.3%
4.0%
6.0%
6.0%
2.0%
4.5%
1.5%
1.5%
1.5%
4.0%
2.1%
Pricing
0.5%
2.0%
0.9%
0.0%
-1.0%
1.0%
2.0%
0.5%
3.0%
3.0%
3.0%
1.5%
2.6%
Mix
0.5%
0.0%
-0.4%
2.0%
2.0%
-3.0%
-1.0%
-2.0%
-1. 0%
-1.0%
-1.0%
-1.0%
-1.0%
FX Impact
5.5%
-4.0%
0.0%
-2.0%
-1.0%
2.0%
6.0%
1.2%
3.2%
-1.0%
1.5%
0.0%
0.1%
-0.3%
-0.5%
-0.5%
0.0%
1.0%
-1.0%
2.0%
-1.0%
0.0%
0.0%
0.0%
0.0%
0.0%
7.2%
9.1%
-3.7%
3.0%
0.2%
1.4%
5.3%
7.1%
3.4%
6.7%
2.5%
2.0%
4.5%
3.9%
7,437.0
8,254.0
7,408.0
7,631.0
1,898.0
2,164.0
1,907.0
2,056.0
8,025.0
2,074.4
2,229.4
1,958.2
2,148.5
8,410.5
4.0%
-2.0%
3.0%
6.0%
6.0%
7.0%
1.0%
5.0%
4.5%
4.5%
5.0%
4.5%
4.6%
Volume (Organic)
5.5%
-5.0%
0.3%
5.0%
5.0%
2.0%
1.0%
3.3%
2.5%
2.5%
3.0%
4.0%
3.0%
Acq/Div
% Sales Growth
Grooming
Net Sales Change Drivers vs. Year Ago

(2011 vs. 2010)
Volume
Volume with
Excluding
Acquisitions & Acquisitions & Foreign
Divestitures
Divestitures Exchange
Price
Beauty . . . . . . .. . . . .. . .. . .. . . .... ... . . . . .

Grooming . .. .. .. .. . . . . .. ... . . .. . .. . . ... .
Health Care . . . . . . .. ... ... . . - - . . . . . . .
Snacks and Pet Care .. . . . . .. . .. . . . . .... . .
Fabric Care and Home Care.. .. . . . .. . . . . . .. .
Baby Care and Family Care . .. . . .. . . .. .. . .. .
4%
3%
4%
3%
5%
5%
1%
7%
8%
(2)%
8%
(1)%
(1)%
Total Company ... . . . . .. . .. . .... . .. . .
6%
5%
0%
1%
5%
1%
Pricing
Mix
0%
2%
0%
(1)%
0%
1%
0%
0%
1%
Mix/
Other
Net
Sales
Gro
Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
(2)%
0%
0%
0%
(2)%
(2)%
3%
(2)%
5%
5%
5%
1%
4%
6%
FX Impact
Acq/Div
% Sales Growth
45.4%
1.3%
5.0%
3.7%
1.0%
1.0%
5.0%
2.0%
2.2%
3.0%
3.0%
3.0%
1.5%
2.6%
2.3%
-2.0%
-1.0%
0.0%
0.0%
0. 0%
-2.0%
-0.5%
-1.0%
-1.0%
-1.0%
-1. 0%
1.0%
0.2%
6.5%
6.0%
0.0%
-4.0%
-3.0%
1.0%
6. 0%
-0.1%
4.8%
-1.5%
-2.3%
0.0%
0.3%
-0.3%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
11 .0%
-8.6%
3.0%
2.2%
3.3%
8.4%
7. 1%
5.2%
9.3%
3.0%
2. 7%
4.5%
4.8%
or fi scal year 20 I 2, Morgan Sta nl ey forecasts a total sales growth rate of 4 .6%, whic h consists
f the following:
11-15

Organic sales growth .. . .. . .. . ... . .... .... . . . ... . . . . ... .. ... .. .. . .. ... ... . .
Volume (organic) .. . .. ... .. .... . . . ... . . . ... . .. . . . ........ . . . . . .. ... . .... .
Pricing . .... . .. . .... . .. ... ..... .... .. .. . . .. .. ... ... .. . . .. .. . . .. . . . .. .. .
Mix . ........ ... ... . .. ... ... . . .... . .. . . .. . .. . . ....
Foreign exchange impact. . .. . .. . ... . ....... . . .. .... . .... . .... . ... . . . ...... .
Acquisitions & divestitures ... . ... . . . ... . . . .. . ... . ... . .... . ..... . ...... . ... . .
Sourc~s in Forecasting Revem~e lnv~stors use a variety of data sources . Companies

de data in conference calls and meetings with analysts. P&G , for example, provided the folg guidance on organic sales growth in its Barclay 's Capital Conference from 2011 :
2.8%
3.2 %
(1.5) %
6%
Sales growth % ....... . . . . . .... .. .......... . ......... ... .... . . . .. . . . .. . . .
Business Outlook
+3%
to +6%
5%
Sum of volume (2.8%), pricing (3.2%). and mix (-1 .5%), which is rounded down to 4.4 in the Excel spreadsheet as mored" Ila
are used than are printed .
ig
4%
3%
Morgan S_tanley forecasts organic sales growth for all of P&G at 4.5%, consisting of 2.8% growth
in volume, a 3.2% increase in prices, a -1.5% decline in growth due to product mix (increasin
percentage of lower-priced goods) . Morgan Stanley analysts also forecast an increase in sales
0.1 % resulting from a weakening of the $US in countries in which PG sells its products.
Following are a few observations that Morgan Stanley analysts conveyed to us about the way
in which their sales forecasts are developed:
1. Each product forecast is built from the bottom up; that is, analysts use information about
a product's market share and the forecasted growth rate for the market of each product
within each country the product is sold . Development of such forecasts uses information
about product market, pricing strategy, and competitive landscape. With this info rmation
analysts forecast overall market growth, the market share for each product, changes i~
product pricing, and changes in the product sales mix. The total sales forecast is the sum
of individual product forecasts for each product market.
2. P&G, like many companies,provides analysts with its own forecasts of sales growth by products,
disaggregated into price and volume. Morgan Stanley analysts also have internally-developed
databases of commodity-price indices, inflation indices, and other macroeconomic indices
against which to evaluate the reasonableness of company-provided forecasts.
3. Sales forecasts are determined by quantity and price along with growth forecasts of the product markets, the company-provided future pricing strategy, and forecasts of price elasticity of
demand . Analysts commonly consider, for example, the effects of a current discount pricing
strategy to increase market share or to gain entrance into a new market, which are followed
by price increases once volume levels and customer loyalty is solidified.
2%
1%
FY 12E
G's organic growth has ranged from 2% to 3% for the two most recent years , but it expects
s to recover as the world economy was expected to emerge from the recession in those previyears. Consequently, P&G's forecast of its revenue growth through fiscal year 2012 was in
range of 3% to 6%. Company expectations are an important input to our forecasts of revenue
wth. Furthe'., as we discuss.above, total organic sales growth is a function of volume and price,
P&G provided the following quarterly information for forecasting these two variables:
Recent Results
Pricing Trend
a.-----------------61-------
41-----+3%
31---21----
Returning to P&G, we saw that Morgan Stanley forecasted no acquisitions or divestitures.

Acquisition of brands is a normal component of P&G 's operating activities, yet acquisitions are
one-time occurrences and come at a cost. We, like Morgan Stanley, focus on revenue growth that
is not acquired, and we believe that organic sales growth is the best predictor of core operating
revenue growth. P&G defines organic sales growth as follows:
+1 %
0
-1
-,
::;;
<(
Organic Sales Growth Organic sales growth is a non-GAAP measure of sales growth excluding
the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons.
We believe this provides investors with a more complete understanding of underlying sales trends
by providing sales growth on a consistent basis. Organic sales is also one of the measures used to
evaluate senior management and is a factor in determining their at-risk compensation.
Summary of Determining Revenue Growth Forecast To recap, each segment is di saggregated into its business units and product lines . The presumption is that determining the revenue
forecasts from the sum of product forecasts is preferable to forecasting total sales growth because
the former uses more information. This implies that we use as much detailed product information
as reasonable (cost vs. benefit) to forecast revenue growth. For example, we saw Morgan Stanley
analysts use data on the Beauty Care and Grooming units to aggregate into the Beauty segment.
We also saw that these forecasts were determined from both price and volume for each product in
each market. Finally, we saw that analysts forecasted from quarterly data and determined annual
forecasts as the sum of quarterly forecasts for each unit and segment.
Pricing inflection point
st-------
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<(
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addition to these company-provided sources of information , analysts can also use internally
databases on macroeconomic data, commodity prices , and other inflation indices ,
ong with ~ata from competing companies, and other publicly available and proprietary datases. Most investors have access to similar information.
velop~d
TEP 2: FORECASTING EXPENSES

e n~xt step in the forecasting process is to predict expenses; for our purposes this includes
perating expenses and non.operating revenues and expenses.
Forecasting Operating Expenses

Generally, we use the following formula to forecast individual operating expenses:
Forecasted operating expense
= Forecasted revenues
x Forecasted operating expense margin
11-16
11-17
The forec~sted operating expense margin is .the expe~se exp;essed as a percent o.f sales (th6
common-sized expense). We normal!~ start w1~h the pnor years n:iargin .and then adjust it bllSed
on our business analysis. One exception to this general formula 1s for income taxes where
.
~
apply the following:
Forecasted income taxes
= Forecasted income before taxes x
Forecasted effective tax rate

Procter & Gam ble Co (PG)
In this case, we begin with forecasted income before taxes, not with sales , and the current effec.
tive tax rate is often a reasonable predictor of the company's long-term effective tax rate, takin
into consideration any transitory items reported in the effective tax rate reconciliation in the ~
footnote .
Income Statement
FY2010
Sales
78,938.0
82,559.0
21,555.2
22,136.4
20,843.3
21,786.9
% Growth
2.9%
4.6%
7. 1%
3.7%
3.0%
4.4%
4.6%
% Organic Growth
3.4%
4.0%
3.4%
4.9%
4.8%
4.6%
4.4%
Cost of Sales
-37,919.0
-40,768.0
-10.702.4
-10,833.4
-10,308.3
-11 ,213.5
-43.057.7
% of Sales
48.0%
49.4%
49.7%
48.9%
49.5%
51.5%
49.9%
-241
134
150
75
41 ,019.0
41,791.0
10,852.8
11 ,303.0
52.0%
50.6%
50.3%
241
-134
-150
-24 ,731.0
-25,668.0
% of Sales
31 .3%
% Growth
11.2%
% of Sales Bps Change
Forecasting Nonoperating Expenses
Gross Profit
Generally, forecasts of individual line items of nonoperating expenses are obtained from the following " no change" forecast model:
= Nonoperating expense for prior period
Forecasted nonoperating expense
Then, using the segment forecasts, Morgan Stanley analysts predict each line item of the income
ment for each quarter of FY2012. We show the following excerpt from their spreadsheet as an
tion. (there are slight differences between the internal analyst spreadsheets reproduced in thi s
le and the published report in the appendix due to timing and other differences)
This assumes no change in nonoperating expenses , with an exception of a "zero forecast" for
items related to discontinued operations . If we make balance sheet financing or investment adjustments in Step 4, we must adjust one or more nonoperating expenses.
To illustrate the forecasting of operating expenses , we tum to Procter & Gamble . P&G's management forecasts an increase in operating profit and cash flow through fiscal year (FY) 2012 as
shown in the following slide from the company 's 2011 presentation to analysts .
Operating Profit Growth
Operating profit growth

inflection point
Mar-12 E
Jun-12 E
FY2012E
86,321.8
50
10,573.4
43,264.1
51.1 %
50.5%
48.5%
50.1%
-75
24
-50
-6,549.9
-6,575.3
-6,343.1
-6.983.1
-26,451 .3
31.1%
30.4%
29.7%
30.4%
32.1%
30.6%
3.8%
10.4%
1.2%
-1.7%
2.9%
3. 1%
233
-24
91
-72
-147
-49
-45
16,288.0
16, 123.0
4,302.9
4,727.7
4,191 9
3,590.3
16,812.7
20.6%
19.5%
20.0%
21.4%
20.1%
16.5%
19.5%
3.3%
-1.0%
-4.4%
3.6%
11 .1%
9.3%
4.3%
-110
-241
-3
147
73
-5
Operating Margin
% Growth
Operating Margin Bps Change
Forecasting Expenses for P&G
Dec-11 E
10,535.0
Gross Margin Bps Change
Operating Income (ex Incremental Restrucluring)
Sep-11 E
-24
Gross Margin %
SG&A Expense (ex Incre mental Restructuring)
FY2011
e remainder of this section explains the details and logic behind these forecasts.
Our forecasted income statement is in Exhibit 11.4. We provide FY201 I actual income statent numbers along with our forecast assumptions and our forecasted numbers for FY2012 . To
plify the exposition, we show only annual forecasts (not quarterly forecasts as estimated by
organ Stanley analysts). Because of this simplification and rounding to whole numbers , the
recasts in this Exhibit differ slightly from those in the analysts' report in Appendix 11 A.
Preliminary Forecasted Income Statement for P&G
2011
Core EPS Growth
Guidance
+6% to10%
FY'09
FY '10
FY '11
Procter & Gamble Co (PG)

Segment Breakdown
FY2007
FY2008
FY2009
FY2010
Sep-1 1 E
Dec-11 E
Mar-12 E
Jun12 E
FY2012E
Pretax Income By Segment
14,710.0
15,632.0
14,803.0
15,314.0
4,282.0
4,366.0
3,641.0
3,205.0
15,494.0
4,104.0
4,525.5
3,989.5
3,390.9
16,009.9
6.3%
-5.3%
3.5%
2.3%
-8.1 %
-3.2%
22.5%
1.2%
-4.2%
3.7%
9.6%
5.8%
3.3'11>
3,528.0
3,558.0
3,648.0
1,081.0
1,141.0
762.0
623.0
3,607.0
982.5
1,196.8
851.4
704.0
3,7J4.6
2.5%
5.3%
0.4%
-1.3%
-12.5%
-1 .1%
-9.1%
4.9%
11 .7%
13.0%
3.5'11>
2,007.0
524.0
635.0
524.0
500.0
2,183.0
556.1
665.3
552.7
538.6
2,312.8
5.6%
7.2%
3.6%
13.4%
12.9%
8.8%
1.0%
4.8%
5.5%
7.7%
5.9'11>
% Growth
Dec-10
Mar-11
Jun-11
FY2011
2012 Est.
sales . . ....... . ...... . .... . ....... .

t of products sold . ..... . . . ... . ...... .
ling, general and administrative expense ..
$82,559
40,768
25,973
100.0%
49.4%
31.5%
$82,559 x 1.046
$86,357 x 49.9%
$86,357 x 30.6%
$86,357
43,092
26,425
100.0%
49.9%
30.6%
rating income . . .... . . . ......... .... .

erest expense ....................... .
her nonoperating income (expense), net .. .
15,818
831
202
19.2%
1.0%
0.2%
subtotal
no change
no change
16,840
831
202
19.5%
1.0%
0.2%
rnings before income taxes .... . ....... .

come taxes on continuing operations .... . .
15, 189
3,392
18.4%
4.1%
subtotal
$16,211 x 25 .0%
16,211
4,053
18.8%
4.7%
$11,797
14.3%
subtotal
$12,158
14.1%
Q1 '12e Q2 '12e Q3 '12e Q4'12e
In addition to the 4.6% revenue growth , P&G's report to analysts also predicts an improved operating profit margin for FY2012.
Turning again to Morgan Stanley 's analysts, we see that they forecast operating profit by
business unit, consistent with how they determine sales forecasts. Following is an excerpt from
the Morgan Stanley spreadsheet that has analysts' forecasts of pretax income:
Sep-10
Forecast Assumptions
perating Expenses for P&G

is section describes the process of forecasting operating expenses (we forecast nonoperating
revenues and expenses following our adjustments to the balance sheet in Step 4).
orecasting Net Sales. Following our discussion above, we forecast net sales to increase by
.6%, which is the forecasted outcome from a predicted 4.5 % increase in organic sales, driven
rimarily by a 2.8% projected increase in volume and a 3.2% increase in selling prices, offset by
1.5% decline in sales from changes in product mjx (selling a greater proportion of lower priced
products) and a positive 0.1 % foreign exchange effect.
Beauty
Beauty Care
3,440.0
% Growth
Grooming
% Growth
1,895.0
2,299.0
1,900.0
Total forecasted pretax income is the sum of forecasted pretax income for each business unit
(which includes $3,734 .6 million from the Beauty Care business unit and $2,312.8 million from
the Grooming business unit as illustrated above).
Forecasting Cost of Products Sold Cost of products sold as a percent of sales increased from
48.0% in 2010 to 49.4% in 201 I. Morgan Stanley analysts forecast an increase in the COGS percentage by 50 bp (basis points, or lOOths of a percent) to 49.9% . That forecast considers the proportion of raw materials and labor in the production process of each product along with forecasts
of changes in commodity costs and wage rates. The 50bp increase in COGS, and the resulting
decline in the gross profit margin described above, are reasonable given the recessionary climate
and the product markets .
11-18
11-19
Subtotaling Gross Profit Gross profit is a subtotal, forecasted sales less forec~sted cost of gOOds
sold (as an alternative, in some cases, we might choose t~ forecast g_ro~s profit; m_ that case, cost of
goods sold is the "plug" figure). P&G does not report this subtotal m its current income statem
and we, therefore, do not include it in our statement (there is no requirement under GAAP to prov:
this subtotal , yet many companies do report it).
a starting point, we begin with Procter & Gamble 's balance sheet for 2011 in Exhibit 11.6.
will refer to these statements throughout this section.
Procter & Gamble Balance Sheet
2011
Forecasting Selling, General and Administrative Expense P&G has reduced SG&A.
expenses as a percent of sales from 31.3 % in 2010 to 3 1. 1% in 20 11 , and it cited further expected
improvement during meetings with analysts. A recessionary climate encourages P&G to focus
on further overhead reduction, and coupled with P&G 's continued foc us on manufacturing and
supply chain improvements , justifies a forecast of reduced SG&A expenses as a percent of sales.
Our forecast is for SG&A expenses to be 30.6% of sales, which is a 50bp improvement on 20ll
and slightly more than the 20bp improvement P&G had from 20 10 to 2011. This is a trend tha~
P&G highlighted in meetings with analysts.
Subtotaling Operating Income Operating income is a subtotal, but we sti ll check its reasonableness. Our forecasts imply a 19 .5% operating income margin, which is close to the previous
year's operating income margin of 19.2%. Further, it is reasonable to expect limited improvement
in operating income margin as sales increase and expenses remain under control in the postrecessionary period 2012-20 14.
Nonoperating Expenses for P&G To this point, we have forecasted sales and individual operating expenses, yielding a subtotal for operating income. The nonoperating section of the income
statement requires estimates of nonoperating assets (which yield interest and/or dividend income)
and nonoperating li abilities (which produce interest expense) . We predict nonoperating revenue and
expense once we estimate nonoperating assets and liabilities at the conclusion of the next section.
Also, since we do not yet have forecasts of nonoperati ng revenues (expenses), we cannot forecast
pretax income, tax expense, and net income. Thus, we complete our forecasts for the income statement at the conclusion of Step 4 .
STEP 3: FORECASTING ASSETS, LIABILITIES AND EQUITY

L03 Forecast the
balance sheet.
Step 3 is to forecast balance sheet items , which cons ist of assets, liabilities, and equity. Special
emphasis is on forecasts of operating assets and liabilities. We generally assume no change in
nonoperating assets, li abi lities, and equity (we discuss exceptions to thi s rule in thi s section and
further adjustments to those accounts in Step 4). Step 3 proceeds with five steps as shown in
Exhibit 11.5 .
IEXHIBIT 11:s
Process in Forecasting the Balance Sheet
l.F.......a ...........
--~~~~~~~~~-'
nt assets
and cash equivalents ... . .... . . . . .. . ...... . .... .... ..... . .. .. .... .. .... $
unts receivable ... ,. . ..... . . .. . _ . ........ .... ... . ............... ... . . .
tori es
terials and supplies . ... . ...... ........ ... ...... ....... . ... . ..... ...... .
rk in process . ..... . . . . ... ... . . .. .... . .. . ....... .. ..... . ........ .. .. .
nished goods ... ... .. .... .. . .......... ...... .... . . .. . . .. . ...... . .. ... . .
2,153
717
4,509
1,692
604
4,088
inventories ....... ...... ..... . . ... ......... . ...... ..... . .. .... . . .... .. .
ed income taxes . .. . . .. ...... . ....... . . ...... . ...... . . . .... . ...... ... . .
id expenses and other current assets .. ..... .. ... ... ...... .. ..... ......... .
7,379
1,140
4,408
6,384
990
3,194
I current assets . ....... .... . .. ..... ........ .... . . . . . .. ...... ..... .... . .
21,970
18,782
rty, plant and equipment

uildings .. .. . .... . ... ........ ........... ... . .. .... .. . .... . .. ... ... .. . .. .
achinery and equipment ........... . ...... ..... ... .. ... . ................. .
nd .. ... .. . .... ....... ...... ... . ....... . ...... .. . .. ........ . .. . ... . . .
7,753
32 ,820
934
6,868
29,294
850
property, plant and equipment. ....... .. ...... . . . .... ..... ....... . .. .. .... .
cumulated depreciation .. .......... . .. . .. .. ... ... .. . ........ . .. . ....... . .
41,507
(20,214)
37,012
(17,768)
property, plant and equipment ... .... .. .. . ..... ....... . ............ . ...... .
will and other intangible assets
Goodwill .. ....... . . .. .. . .... . ..... . ....... . .... . ..... . . . .............. . .
rademarks and other intangible assets, net ........ ... ....... .. . .. ........ . .. . .
21 ,293
19,244
57,562
32 ,620
54,012
31 ,636
goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90, 182
85,648
noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,909
4,498
I assets .. ........ .... ........... . .. ... ... ... . ..... . . .. ............ ... . . $138,354
$128, 172
bilities and shareholders' equity

rrent liabilities
unts payable ... . .. .. . . ............. . ... . . .. .... .. . . .... ............... $
rued and other liabilities ...... . ... .. .. . ......... . .......... .. .. ... ........ .
t due within one year ............. .. ...... .. . .. ... . . . .. . .. .. . .. ..... . .... .
.................
2,768
6,275
8,022
9,290
9,981
2,879
5,335
7,251
8,559
8,472
I current liabilities . . ... . ... ...... ... ... . . . ... ... .. . ....... .... .. .. . . ..... .
27,293
24,282
ng-term debt . . .... .. .............. . .. .. ..... . . . . ... . .......... ... .. ... .

erred income taxes . .... . ...... ... . .. .. . .. .. . . .... .. .... . ..... . ... . .. ... .
er noncurrent liabilities . . .. .... . ....... . . . . . ... ..... . .... . ..... . .. ..... . .. .
22,033
11 ,070
9,957
21 ,360
10,902
10,189
al liabilities .. .. ...... ... . . . .. . . ... ..... .. ...... .. . . . . . .. ...... .... . . .. . . .

areholders' equity
nvertible Class A preferred stock, stated value $1 per share (600 shares authorized) ... .
n-voting Class B preferred stock, stated value $1 per share (200 shares authorized) . . . .
mmon stock, stated value $1 per share (10,000 shares authorized ;
shares issued: 2011-4,007.9, 2010-4,007.6) . .. . . ..... .. . . ..... .. . . ........ .. .
ditional paid-in capital ......... ... ............ ... .. . . . ... . .... . .... .... .. . .
eserve for ESOP debt retirement .. . . .. .. .. ....... . . . .... . . .... ... .. . . .. . . ... . .
cumulated other comprehensive income (loss) . .. . .. .... . .... . ....... ... . . . . . . . .
easury stock, at cost (shares held: 2011-1,242.2, 2010-1 , 164.1) . ... ... .. ..... .... .
etained earnings .. . . ..... . .. .. ... . ..... ........ .... ... ... .. ..... ...... . .. .
oncontrolling interest . ..... .. .. . .. .. .... ....... .. ..... ......... . . . .. . . . . .. .
70,353
66,733
1,234
1,277
4,008
62,405
(1,357)
(2,054)
(67,278)
70,682
361
4,008
61,697
(1,350)
(7,822)
(61,309)
64,614
324
68,001
61,439
otal liabilities and shareholders' equity . .. . .. . ... . ..... . . ... .. . . ....... . .... . .... $138,354
$128,172
otal shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.aitsafllllll . . . . . .
2010
---
rocess of Forecasting Balance Sheet Items

e normally make one of three general assumptions when forecasting assets , liabilities, and
equity.
11-20
11-21
1. Forecast amounts with no change. We can use a no-change forecast , which is commo
nonoperating assets (investments in securities , discontinued operations, and other nono n
ing investments) . After we have generated forecasts of the balance sheet, we must reex
the no-change forecasts to see if they are reasonable or if they require adjustment.
2. Forecast contractual or specified amounts. We can use contractual or other speci
payment tables to forecast se lected balance sheet items . For example, footnote disclos
contain scheduled maturities for long-term debt, capital leases, and mandatory redeemable
preferred stock for a five-year period subsequent to the financial statement date. We can USe
those schedules and assume that the required payments are made as projected .
3. Forecast amounts in relation to revenues. We can use an item 's relation to revenues to
forecast that item. The underlying assumption is that, as revenues change , so does that item
in some predictable manner. For example, in the case of operating assets , it is reasonable to
assume that the required investment in receivables, inventories , and PPE is related , in some
manner, to the level of revenues . Similarly, in the case of operating liabilities, it is reasonable to expect that accounts payable will grow with COGS (which grows with revenues),
and accrued liabilities will grow with increases in payroll , utilities , adverti sing, and other
expenses (which all grow with revenues).
When forecasting amounts in relation to revenues , the third forecastin g assumption above, there
are three common methods: (1) forecasts using the percent of revenues , (2) forecasts us ing turnover rates , and (3) forecasts using days outstanding ratios.
Forecasts Using Percent of Revenues Forecasts that use the percent of revenues build on the
relation between revenues and the account being forecasted ; this relation follows:
Forecasted account balance = Forecasted revenues x (
Actual account balance)

A
ctua1 revenues
For example, if the relation between the actual account balance to revenues is l 0%, and forecasted
revenues equal $100 , then the forecasted account is $10 , computed as $ 100 X 10% .
Forecasts Using Turnover Rates Turnover rates have the following general form : Turnover
rate = Revenues (or COGS)/ Average account balance. Using algebra to rearrange terms, we
obtain: Average account bala,nce = Revenues (or COGS)/Turnover rate . Substituting forecasted
va lues we get:
Forecasted account balance
= Forecasted revenues (or COGS)/Turnover rate
entional way using the average account balance, we would forecast the average account balrather than the ending account balance. In this case, we must make one of the two adjustments
ed in the previous section.
walence of the Three Forecasting Methods If we compute the turnover rate and the
outstanding using ending account balances (meaning that we are properly forecasting the
g account balance) , it does not matter which of these three forecasting methods we use. To
trate, consider a company with current-period revenues of $1 ,000 and a forecasted revenue
th of 4% (or $1 ,040, computed as $1 ,000 X 1.04). Assume that the current accounts receivending balance i:t $200 and that we want to forecast accounts receivable for next year. Using
h of the three methods above , our forecasted accounts receivable is $208 and is computed as
Forecast Method
Percent of revenues . . ....... . .. .. .
Turnover rate . .. .. . . . .. . .. . . . . .. .
Days outstanding .. .. . . . . ...... .. .
Forecast
Forecast Computation
$208
$208
$208
$1,040 x ($200/$1,000)
$1 ,040/($1 ,000/$200)
{(($200 x 365)/$1 ,000] x $1 ,040}/365
h of these forecasting methods yields the same result. Analysts commonly use either percent
sales or days outstanding. The choice between percent of sales and days outstanding depends
the audience. Percent of sales is simple and intuitive . Days outstanding is well suited for
alyses that are used in discussions with operating managers , as most managers are familiar with
ys outstanding ratios and can identify with projected changes (for example, what is the effect of
llecting our receivables two days faster?). The choice is a matter of personal preference as all
e methods yield the same result. We use the percent of sales in our fore casts of balance sheet
counts because (1) it appears to be the most commonly used method, (2) it is the method that
&G management uses in its meetings with analysts, and (3) it is the method used by Morgan
anley (and the majority of investment houses that we are familiar with) in the analysis illustraon we provide in this module and in Appendix 11 A.
orecasting Balance Sheet Items

e illustrate the forecasti ng of balance sheet items for Procter & Gamble .
orecasting Operating Assets
Consequently, if we have forecasted revenues (or COGS) and a forecasted turnover rate, we can
forecast the account balance. However, there is a problem with this method if we use turnover rates
as traditionally defined using average account balances; in this case the method would forecast the
average account balance. Balance sheets report ending account balances . This issue is typically
resolved in one of two ways:
s section describes the process of forecasting operating assets using the percent of revenues
ethod. Morgan Stanley analysts forecast balance sheet items as a percentage of sales (except
for Inventories and accounts payable that are forecasted as a percent of cost of goods sold). We
provide an excerpt from the Morgan Stanley forecasting spreadsheet in Exhibit 11.7, which lists
the forecasting assumptions (the entire spreadsheet is in the analysts' report in Appendix llA).
1. Compute the turnover rate using ending balances rather than average balances; then, our
forecast is for the ending account balance.
2. Multiply the forecasted average account balance by 2 and then subtract the beginning account
balance; this yields the forecast for the ending account balance .
Forecasting Accounts Receivable P&G reports accounts receivable as a percentage of sales

equal to 6.8 % and 7 .6% at year-end 2010 and 2011 , respectively. Recall that Morgan Stanley 's
forecasts were prepared in a recessionary environment. It was reasonable , therefore , to expect a
continuing decline in the fina ncial condition of P&G customers; meaning that some P&G customers were likely to pay more slowly, if at all. This increases predicted accounts receivable relative
to sales . Accordingly, Morgan Stanley analysts forecasted a slight increase in P&G's ratio of
accounts receivables to sales for 2011 quarters , but returning to the FY2011 level of - 7 .7% of
projected sales by year-end 2012. Using 7 .7% accounts receivable-to-sales and forecasted sales
of $86,357 million, we forecast accounts receivable of $6,649 mill ion ($86,357 million X 7 .7%).
The 7 .7% equates to an average collection period of 28 .l days (0 .077 X 365 days).
Forecasts Using Days Outstanding Days outstanding ratios have the following general form:
Days outstanding = Account balance/Average daily revenues (or COGS), where Average daily
revenues (or COGS) = Revenues (or COGS)/365. We can forecast the account balance by rearranging terms as follows:
Forecasted account balance
= Days outstanding x
[Forecasted revenues (or COGS)/365]
If days outstanding is computed using the ending balance of the account, the resulting forecast is for
the ending balance of that account. However, some analysts prefer a shortcut method to compute days
outstanding as 365/Turnover rate . Their justification is based on the mathematical equality where
[365/Turnover rate] = [365/(Revenues/Account balance)] = [(Account balance X 365)/Revenues]
=[Account balance/(Revenues/365)] . Importantly, however, if this turnover rate is computed in the
Forecasting Inventories Morgan Stanley analysts forecast inventories as a percent of COGS

rather than as a percent of sales. Either approach is fine and does not materially affect the forecasts as long as the method is used consistently. The motivation for use of COGS is that inventories are stated at cost, not at retail. As a result, many analysts use COGS to forecast inventories
and the related accounts payable. (Jn the assignments, we forecast inventories as a percent of
sales so that all balance sheet items are forecasted based on the same basis.) P&G 's inventories
11-22
11-23
Module 11 I
Forecasting Financial Statements

i EXHIBIT 11.7
Module 11
Morgan Stanley Forecasted Balance Sheet Percents
Procter & Gamble Co (PG)

Sep-11 E
Dec-11 E
Mar-12 E
Jun-12 E
Cash % of Sales
3.6%
3.4%
2.9%
2.8%
3.0%
2.9%
2.9%
AR % of Sales
6.8%
7.6%
7.8%
7.9%
7.9%
7.6%
7.7%
FY2010
AR Days
Inventories% COGS
Inventory Days
Deferred Inc Tax Assets% Sales
other CA % Sales
Capex, net of dispositions
FY2011
FY2012E
24.7
27.7
28.3
28.7
29.0
27.8
28.1
16.8%
18.1%
18.9%
18.1%
19.1%
17.2%
17.9%
61.5
66.1
68.9
66.2
69.9
62.6
65.2
1.3%
1.4%
1.6%
1.6%
1.6%
1.6%
1.6%
4.0%
5.3%
4.8%
4.5%
4.8%
4.5%
4.5%
-3,067.0
-3,306.0
-663.7
-874.9
-938.8
-1,295.1
-3,772.5
Addition to PPE as % Sales
3.9%
4.0%
3.1%
4.0%
4.5%
5.9%
4.4%
Depreciation % opening PPE
16.0%
14.7%
14.3%
14.3%
14.1%
14.3%
14.3%
Depreciation o/o Net PPE
16.2%
13.3%
3.6%
3.6%
3.5%
3.5%
13.8%
AP % COGS
19.1%
19.7%
17.0%
15. 1%
15.9%
18.3%
19.1%
AP Days
69.8
71.8
62.2
55.2
58.2
66.8
69.6
10.8%
11.3%
11 .6%
11.4%
12.1%
11.0%
11.1%
Deferred Inc Tax Liabilities % Sales
13.8%
13.4%
12.9%
12.4%
13.2%
12.7%
12.8%
Other Liabilities
12.9%
12.1%
11 .8%
10.9%
11 .7%
10.9%
11.0%
Dividends Paid
$1.80
$1.97
$0.53
$0.53
$0.53
$0.57
$2.15
29,832.0
32,014.0
32,231.7
32,884.1
32,271.4
31,949.6
31 ,949.6
2,879.0
2,768.0
2,500.0
2,500.0
2,500.0
2,500.0
2,500.0
26,953.0
29,246.0
29,731.7
30,384.1
29,771.4
29,449.6
29,449.8
2.8%
2.7%
2.6%
2.6%
2.6%
2.6%
2.6%
1.5%
1.5%
1.5%
1.5%
1.5%
Accrued and other liabilities% Sales
Total Debt
Cash
Net Debt
Interest Rate on Debt
Interest Rate on Cash
Net Debt/LTM EBITDA
Capital Employed
1.4x
1.5x
1.Sx
1.6x
1.5x
1.5x
1.5x
109,483.0
118,274.0
119,312.2
119,958.7
119,m .8
118,945.0
118,945.0
increased in 2011 from 16.8% of COGS to 18.l % of COGS. In the MD&A section of its 10-K,
P&G 's management attributes the inventory increase to:
higher commod ity costs, business growth and increased stock levels in advance of initiatives and
sourcing changes. Inventory days on hand increased by five days due to the impact of foreign
exchange, higher commodity costs and increased safety stock levels.
Morgan Stanley analysts forecast a slight easing of these pressures to yield an annual level of
17 .9% of COGS for FY2012 (they estimate inventories on a quarterly basis as: Quarterly COGS
X 4 X Inventory %COGS; the year-end estimate, then, is the 4Q estimate, and the 17 .9% is
the ending 4Q inventory estimate divided by the annual COGS estimate). The 17.9% of COGS
equates to an inventory days on hand of 65 .3 (0.179 X 365 days, yielding a 0.1 rounding difference from the spreadsheet), which is down from 66.l days at year-end 2011.
To be consistent with our approach of estimating balance sheet items in relation to the sales
estimate, we forecast inventories at an equivalent rate of 8.6% of sales (computed from Morgan
Stanley's estimate of ending inventories of $7,557.2 million divided by analysts' estimates of
annual sales of $87 ,754.5 million-numbers from the FY20 l2E column of the forecasted balance
sheet and income statement on pages 6 and 7 of the Morgan Stanley analysts' report in Appendix
llA). This results in forecasted inventories of $7 ,427 million ($86,357 million X 8.6%).
Forecasting Deferred Income Tax Assets and Other Current Assets Morgan Stanley
analysts forecast a slight increase in deferred tax assets to 1.6% of sales (up from 1.4% of sales in
FY201 l) and a reduction of other current assets from 5.3 % of sales to 4.5 % of sales. Companies
generally provide little information about these accounts in their footnote and MD&A disclosures.
We assume a continuation of these percentages in FY2012.
Forecasting Capital Expenditures, PPE, and Accumulated Depreciation Capital expenditures (CAPEX) are often a large cash outflow and a major component of free cash flow, which
I Forecasting Financial Statements
e focus of cash-flow-based equity valuation models. (Free cash flow is defined in Module 13
OPAT - Increase in NOA] and is also defined in finance literature as [Net cash flow from
rating activities - CAPEX] .) CAPEX is used in forecasting PPE (gross), where Forecasted
(gross) = Actual PPE (gross) + Forecasted CAPEX. (We typically do not forecast disposis of PPE unless they are specifically identified by management in the MD&A section of the
K or other source.) P&G reported CAPEX as a percent of sales for FY2010 of 3.9% and for
2011 of4 .0%. In its meetings with analysts , P&G provided guidance for CAPEX as a percentof sales of 4% to 5% of sales, and Morgan Stanley forecasts CAPEX at 4.4% of sales in their
ast. Based on our forecasted sales of $86,357 million , CAPEX is projected to be $3,800
' lion (computed as $86,357 million x 4.4%).
The forecast of net PPE is computed as: Beginning-year PPE, net + Forecasted CAPEX asted Depreciation. Morgan Stanley analysts combine amortization with depreciation; thus ,
consistency, we will do the same. ~iation and amortization are typically estimated by
rcenta e of re orted depreciation and amortization expense (often reported in the statement
cash flows if not disc ose on the income statement) ~percentage o_f_beginning-year PPE,
t. This is the approach used by Morgan Stanley analysts . P&G's depreciation and amortization
14.7% of the beginning-year balance for FY201 I ($2,838 million/$ 19,244 million) . However,
organ Stanley analysts forecast a slight decrease in that percentage to 14.3% for FY2012 and we
that rate in our forecast. Using the FY2011 net PPE of $21 ,293, our forecast of depreciation and
ortization for FY2012 is $3,045 million ($21,293 million X 14.3%) and our forecast of FY2012
t PPE is $22,048 million as computed here:
Actual net PPE for FY2011 . _. .. . ... _... . . . . . $21,293 million
Add: CAPEX. _. . ... . .... . ..... . . ... ... . . .
3,800 million
Less: Depreciation and amortization .. _.... _. _ (3,045) mi llion
Forecasted net PPE for FY2012 . .. _.. _... .. .. $22,048 million
($86,357 sales
4.4% CAPEX-to-sales)
($21,293 PPE, net for FY2011 x 14.3%)
e applied all amortization expense to net PPE as PPE assets are sometimes amortized as well
depreciated. Often amortization expense relates to intangible assets (see next section). In that
se, we apportion depreciation and amortization between depreciable and intangible assets if we
ave sufficient information.
recasting Goodwill and Other Intangible Assets and Amortization Goodwill and other
tangible assets arise mainly in connection with acquisitions of other companies. Unless an acquision is pending at year-end, and we have sufficient information about its financial impact, we forecast
no change for goodwill and other intangibles. Goodwill is not amortized, but some other intangible
assets are (see Module 9). If we can identify the intangible assets that are amortized and can estimate
their amortization expense, we can forecast that expense and reduce the intangible assets accordingly
like we did for depreciable assets above . We forecast no change in these intangible assets in this case.
Forecasting Other Noncurrent Assets Other noncurrent assets are assumed to be part of
operating assets unless information suggests otherwise. Since we have no information to suggest
otherwise , we forecast no change in other noncurrent assets.
Forecasting Nonoperating Assets

This section forecasts nonoperating assets for P&G . Generally, we use the no-change forecast
model for nonoperating assets .
Forecasting Cash Our forecasting process assumes that the cash on the balance sheet reflects
an economically appropriate balance that we forecast similarly for the next fiscal year. Procter &
Gamble's 2011 fiscal year-end cash balance is $2,768 million (3.4% of sales), down from $2,879
million (3 .6% of sales) in the prior year. We assume 3.4% of sales in our forecast , resulting in a
forecasted cash balance of $2,936 million ($86,357 million X 3.4%) for FY2012.
Forecasting Investment Securities The no-change forecast model applies to marketable securities. For P&G, it does not report marketable securities. We adjust the level of marketable securities (cash in this case) or short-term debt in Step 4 when we balance the balance sheet.
11-24
11-25

BUSINESS INSIGHT
Does Separately Forecasting
Our forecasting process, and that of the Morgan Stanley analysts, is to forecast a cash bal
and adjust the level of investment securities or short-term debt to balance the balance sheet~
assume that cash consists of cash equivalents and then forecast interest income on the cash bal,.
ance at the same rate as that for investment securities. Both cash and marketable securities
treated as nonoperating assets. This means it makes no difference whether we assume a la:
balance for cash and a correspondingly smaller balance for investment securities or whether er
assume a smaller balance for cash and a larger balance for investment securities. However, we:
in recent years that cash balances have ballooned as companies face economic uncertainty. Still
we are indifferent as to whether that excess liquidity is reported as cash or as investment securiti~
as they are both nonoperating assets. We see in Modules 13 and 14 that changes in both cash and
securities increase or decrease the value of a company dollar-for-dollar. Our focus is on net operating assets (NOA), which impact company value to a much greater extent. Bottom line: do not focus
on the mix between cash and securities.
sheet with taxes payable as a line item, we suggest forecasting that account using the historipercentage of taxes payable to tax expense .
asting Deferred Income Tax Liabilities Deferred tax assets and deferred tax liabilities
erally relate to the level of business activity. Accordingly, we can make a case to forecast these
unts as a percentage of sales. Indeed, Morgan Stanley follows this practice. That is , foreted deferred tax liabilities are 12 .8% of sales , down slightly from 13 .4% of sales in FY2011 .
asting Other Noncurrent Liabilities Other noncurrent liabilities for P&G primarily
ate to pension and other post-retirement benefits. We reasonably assume that these obligations
w with the size of the business . Following thi s notion , Morgan Stanley forecasts these liabilias a percentage of sales. For P&G , these liabilities decreased as a percentage of sales , from
.9% in FY2010 to 12.l % in FY2011. We, like Morgan Stanley, forecast a continuation of this
line to a level of ll .0% of sales for FY2012 .
recasting Nonoperating Liabilities and Equity

is section forecasts nonoperating liabilities and equity for P&G .
Summary of Asset Forecasts To this point, we have forecasted all of P&G 's operating and
nonoperating assets . Following the forecast of liabilities and equity in the next section , we adjust
the balance of investment securities or short-term debt to balance the balance sheet. This is Step 4.
recasting Debt Due Within One Year P&G discloses the following table for its debt due
'thin one year:
, in millions
Forecasting Operating Liabilities

This section describes the process of forecasting operating liabilities for P&G.
Forecasting Accounts Payable Morgan Stanley forecasts accounts payable as a percentage
of COGS. The rationale is that inventories , which drive most accounts payable, are reported
at wholesale cost and not retail. Another common method is to forecast accounts payable as a
percentage of sales . Either method results in reasonable forecasts if consistently applied. For
P&G , accounts payable as a percent of COGS increased from 19. I% in 2010 to 19 .7% in 20 11.
P&G explains this increase as follows:
Accounts payable, accrued and other liabilities increased primarily due to increased expenditures
to support business growth, primarily related to the increased marketing investments.
Morgan Stanley forecasts a reduction of accounts payable as a percentage of COGS from 19.7%
in FY2011 to 19 .1% in FY2012. This corresponds to the reduction in inventory quantities previously discussed. As reported in Exhibit 11.7, Morgan Stanley's forecasts imply a decrease in
accounts payable days outstanding from 71.8 (-19.7 % X 365) to 69 .6 days (-19 .1 % X 365).
Consistent with our approach of forecasting balance sheet items in relation to forecasted sales,
we forecast accounts payable at an equivalent rate of 9.2% of sales (using Morgan Stanley 's estimate of accounts payable of $8,059 .6 million divided by analysts ' estimates of annual sales of
$87 ,754.5 million-see the analysts' report in the appendix), resulting in an estimate for FY2012
accounts payable of $7,945 million ($86,357 million X 9.2%).
Forecasting Accrued and Other Liabilities Accruals as a percent of sales increased from
10.8% in 2010 to 11.3% in 2011. Footnotes reveal that P&G 's accruals relate primarily to marketing and compensation expenses , although a large component is classified as "other." Morgan
Stanley forecasts this account to remain fairly constant as a percentage of sales, decreasing
slightly from 11.3% of sales to 11. I% of sales; similarly, we use l l.l % in our forecast.
Forecasting Taxes Payable Because taxes payable relate directly to tax expense , we prefer
to express taxes payable as a percentage of tax expense for forecasting purposes . P&G does not
separately identify income taxes payable on its balance sheet. Hence, this account is not included
in our forecasts directly, but is forecasted as part of another account. When we encounter a bal-
2011
2010
$2,994
6,950
37
$ 564
7,838
70
t due within one year
rrent portion of long-term debt .. .. ....... . . . . . ...... . . ... .... . . ... . . ..... .
mercial paper .. . .. . .. .. .. . .... .. ... . .. . . . . .. ....... . . . .. . .... . .... .. .
-$9,981
-$8,472
f the $9,981 million total debt due within one year, $2 ,994 million represents contractual
aturities of long-term debt and the $6 ,987 remainder represents other short-term borrowings.
e assume that all contractual maturities of long-term debt will be repaid. Thus , we forecast
e $2,994 million to be repaid. For the remaining short-term debt we assume no-change (Step
revisits this) . Commercial paper represents short-term unsecured borrowings that are typically
financed by newly issued commercial paper and are not repaid at maturity. Thus, we forecast
$6,987 as short-term debt before any current portion of long-term debt. As we show below, the
FY2012 current maturities of long-term debt are $3,839 million and, thus, we forecast total debt
due within one year as $10 ,826 million ($6,987 million + $3,839 million).
Forecasting Long-Term Debt P&G's balance sheet reports long-term debt of $22,033. We use
the no-change method to forecast long-term debt (and potentially modify this with optional Step
4). Companies are required to disclose the maturities of long-term debt for each of the five years
subsequent to the statement date. Following is the disclosure by P&G in its long-term debt footnote:
Long-term debt maturities during the next five years are as follows:
June 30
Debt maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2013
2014
2015
2016
$2,994
$3,839
$2,229
$3,021
$2 ,300
In our forecast for 2012, we classify the amount due in 2013, $3,839, as current maturities of longterm debt, and the remaining balance of $18,194 is forecasted as long-term debt. The $3 ,839 current
maturities of long-term debt are, then, added to short-term debt as we discuss in the preceding section.
Forecasting Equity Accounts Prior to Step 4, we forecast FY2012 equity items with no
change, with two exceptions . The first exception is retained earnings, which are increased by
forecasted net income and are reduced by forecasted dividends. There are two approaches to
forecasting dividends and either is acceptable:
11-26
11-27
1. Forecast dollar amount of dividends per share and multiply by .the forecasted number
shares outstanding (and not the average number of shares outstan dmg as reported in the E
calculations), or
2. Forecast a dividend payout ratio (dividends I net income) and multiply this dividend pay
ratio by forecasted net income.
oUt
Morgan Stanley utilizes the first approach and ~or~casts divide~d~ per share of $2.15 for the
year, a 9 .1 % increase over the $ I .97 p~r ~hare paid m FY2011 ( dJV1dends per share for FY20U
increased by 9 .4% over FY2010; so, this increase of 9 .1 % seems reasonable).
Morgan Stanley forecasts the number of shares outstanding after considering the effects Of
anticipated share issuances under employee stock option plans and share repurchases in treasury
stock, resu lting in estimated shares outstanding for FY2012 of 2,944.6 million .2 Multiplying for
forecasted dividends per share of $2 .15 by the estimated number of shares outstanding of 2,944.6
million yields a forecasted dollar amount of dividends paid of $6,330.9 million . This is in line with
guidance given by P&G of approximately $6 billion in dividends from its meeting with analysts.
Our initial forecast for ending FY2012 retained earnings is $76,509 million, computed as
follows:
$70,682 million beginning retained earnings
+ 12,158 million forecasted net income

-
6,331 million forecasted dividends

$76,509 million ending retained earnings
This forecast wil l likely change in Step 4 once we forecast the income (expense) related to new
investments (borrowing), thus affecting our estimate of net income .
The second exception includes share repurchases (treasury stock) that are announced or
planned by a company. In its Barclays capital conference, P&G provided the following slide that
indicates its intentions to repurchase about $6 billion for treasury stock in the 2012 fiscal year:
This slide reflects continuation of P&G's share repurchase program that has resulted in the repurchase of $ 19.4 billion of treasury stock over the prior three years. Consistent with PG guidance,
we forecast the purchase of treasury stock amounting to $6,000 million in 2012.
STEP 4: ADJUST FORECASTED STATEMENTS7

Our (initial) forecasted balance sheet yields total assets of $139,419 million and total liabilit_ies
and equity of $ 134,932 million . Because total assets exceed the total of liabilities and equity,
additional financing is required and we assume an increase of $4,487 million of short-term debt
to balance. Another option would have been to reduce short-term investments, but P&G did not
report short-term investments on its FY20 I 1 balance sheet.) (Note some circularity here in that
adjusting debt results in changes in interest expense that results in additional debt, and s? ?n.
Morgan Stanley allows for one adjustment as we describe above, which is the $4,487 m1Ihon
Computati on of shares outstanding requires estimates of anticipated share issuances and repurchases . We do not know
the specific inputs that Morgan Stanley used in their com putation , but can speculate that the share issuances relate to the
exercise of employee stock options (footnotes usually disclose the number of shares issued for the current and prior two
years) . Share repurchases might be estimated by guidance provided by the company for the dollar amount of anttc1pated
share repurchases divided by an estimate of the anticipated share price for the comin g year. Thus, expected dollar amount
of di vidends is then: Estimate of ending basic shares outstanding (Begi nnin g shares outstanding + Share issuances Share repurchases) X Expected dividends per share (often disclosed by a company in guidance to analysts).
dditional debt in our example and the related interest expense. Given the estimates involved
orecasting, additional precision of further iterations is unnecessary.) Had total liabilities and
'ty been greater than total assets, we could have reduced short-term debt or increased shortinvestments to balance. 3
just Forecasted Income Statement: Nonoperating Expenses

en our estimates of debt as a result of the "balancing" adjustment in Step 4, we can now finish
forecasts for the income statement (which we presented in Exhibit 11.4). Specifically, we can
w forecast nonoperating expense (and revenue), compute pretax income, forecast tax expense,
compute net incvme. This Rection describes the process for forecasting those remaining items
the income statement.
casting Interest Expense and "Other" P&G 's FY2010 interest expense of $831 million
plies a 2.7% rate of interest based on average outstanding interest-bearing debt for that year of
,923 million ([$29,832 million + $32,014 million]/2). This average interest rate was slightly
s than the 2.8% rate reported for FY2010. Morgan Stanley analysts forecast a slight decline
FY2012 to 2 .6% in their report (see Exhibit 11.7), and we also use 2.6% to forecast interest
pense for FY2012.
Of the long-term debt outstanding as of the end of FY2011, footnotes reveal that $2,994 miln is scheduled to mature during FY2012. Given our forecasted $4,487 million increase in shortdebt , then our forecast for interest expense must be adjusted accordingly (we would si milarly
crease interest income if we had projected an increase in short-term investments) . This anticited repayment of $2,994 million and borrowing of $4,487 million , assuming borrowing and
payment ratably over the year, results in a forecasted interest expense of $852 million ([$32,014
'Ilion + {-$2,994 million + $4,487 million}/2] X 2.6%). (Our amount is slightly higher than
e Morgan Stanley estimate of $830 million , which they obtain from a detailed analysis of the
bt payments and borrowings, vis-a-vis the simple average we assumed.)
Other nonoperating income for FY2011 of $202 million includes interest income on short-term
vestments (primarily cash balances invested in overnight investments) and net gains on divesties . Since we are not forecasting any acquisitions or divestitures, nonoperating income is lower for
FY2012. Morgan Stanley forecasts an investmentrateof l .5%onavailablecash balances(assumed to be
approximately $2,900 million) , which results in $44 million; alternatively, one can use an average
of the beginning and endi ng balances ([$2,768 million+ $2,936 million]/2 X l.5 %), which we
demonstrate when computing the two-year-ahead forecasts in Exhibit 11.10.
Forecasting Income Taxes Given our forecast of interest expense, we obtain a forecasted pretax
income of $ 16,032 million . Our general method to forecast income taxes is to predict little change,
if any, in a company's effective tax rate, assuming it is within reasonable limits and absent the company disclosing substantial transitory tax items in the reconciliation of the effective tax rate footnote
or an anticipated rate change. Morgan Stanley forecasts a 25.0% effective tax rate for 2012-14,
within the range of25.7% and 23.5% that P&G reported for FY2010 and FY2011, respectively, and
we use a 25% forecasted tax rate as well. Consequently, our forecast of tax expense is $4,008 million
(computed as $16,032 million of pretax income X 25% forecasted tax rate).
Net Income The resu lting forecasted net income is $12,024 million for FY2012, or $4.08 per
diluted share. This forecast is slightly below P&G 's EPS guidance for FY2012 of $4 .17-$4.33 per
shart<, but greater than the $3 .93 per diluted share reported in the P&G 10-K for FY2011.
Adjust Forecasted Balance Sheet

The forecasted balance sheet and the revised forecasted income statement for Procter & Gamble
is in Exhibits I l .8A and I I .8B. We show the FY201 l balance for each account and the computations required to obtain the forecasted FY2012 balance, including the updated retained earnings
computation reflecting the net income computed.
3
When adjusting the balance sheet to balance, we must take care to not inadvertently alter a company 's financial leverage . Recall that companies seek to maintain optimal levels of debt and equity to achi eve a desired credit rating for their
debt , among other objectives. Thus , we must maintain the past debt-to-equity relation within reasonable limits when
balancing the forecasted balance sheet. For example, if our decis ion is to retire debt or to repurchase common stock, we
should do it so that the hi storical debt-to-equity relation is rough ly maintained.
11-28
11-29

-
EXHIBIT 11.SA
s of our forecasts . We draw on the mechanics behind the preparation of the statement of cash
ws , which we discuss in Module 2 . Specifically, once we have forecasts of the balance sheet
income statement, we can compute the forecasted statement of cash flows just as we would
histori cal counterpart.
Forecasted Balance Sheet for P&G

2011
($millions)
Current Assets
Cash and cash equivalents . . . . . .. .. ... .. .. .... .
Accounts receivable . .... . .. . ... ... ...... . .... .
Inventories . . .... ... . . .. . ...... . ....... . . . .. .
Deferred income taxes . ..... . .. . ... . ... .. .... . .
Prepaid expenses and other current assets .... .. . . .
86,357
86,357
86,357
86,357
86,357
2,768
6,275
7,379
1,140
4,408
x 3.4%
x 7.7%
x 8.6%
x 1.6%
x 4.5%
subtotal
Total current assets .... .. .... . ... . .. ... ...... .

Net property, plant and equipment .. . .. . ...... .. .
21 ,970
21,293
Goodwill and other intangible assets

Goodwill .... . .... . .. . .... . ....... . ... . ... .
Trademarks and other intangible assets, net ... . . .
57,562
32,620
no change
no change
Net goodwill and other intangible assets .. . ... . .. . .

Other noncurrent assets . . . . . . .... . .. . .... .. ...
90,182
4,909
subtotal
no change
21,293
+ 3,800
- 3,045
2,936
6,64g:
7.427
1,382
3,886
22,280
22,048
57,562
32,620
90,182
4,909
subtotal
$138,354
$139,419
8,022
9,290
0
9,981
86,357 x 9.2%
86,357 x 11.1%
plug
9,981 - 2,994 + 3,839
Total current liabilities ...... . ..... . . .. ...... .. . .

Long-term debt .... . ..... .. ....... . .. .. .. .. . .
Deferred income taxes ........ . . . . . ... . ....... .
Other noncurrent liabilities . ............. .... . .. .
27,293
22 ,033
11,070
9,957
subtotal
22,033 - 3,839
86,357 x 12.8%
86,357 x 11 .0%
32,978
18,1 94
11,054
9,499
Total liabilities . ......... . . . . . .. . . . . .. ... . . . . .

Shareholders' equity
Preferred stock ........ . . . ..... . . . ... . ..... .. .
Non-voting Class B preferred stock . .... . ........ .
Common stock . . ...... ... ... ... .. .... . ... .. . .
Additional paid-in capital . . . . ... . . . . . ........ . . .
Reserve for ESOP debt retirement . . .. . .. . ... . ... .
Accumulated other comprehensive income (loss) . .. .
Treasury stock .. ....... . . ..... .. .. ... .. . .. . . .
Retained earnings . .. . .. .... ..... . .. . . . ... . . . .
Noncontrolling interest . .......... . ... .. . . ..... .
70,353
subtotal
71,725
1,234
0
4,008
62,405
(1,357)
(2,054)
(67,278)
70,682
361
no change
no change
no change
no change
no change
no change
(67,278) - 6,000
70,682 + 12,024 - 6,331
no change
1,234
0
4,008
62,405
(1,357)
(2,054)
(73,278)
76,375
361
Total shareholders' equity ... . . . . . ....... . .... . .
68,001
subtotal
Total liabilities and shareholders' equity . . .. .. . . ... .
$138,354
subtotal
I EXHIBIT 11.SB
.
.
.
.
7,945
9,586
4,621
10,826
2011
x 1.046
x 49.9%
x 30.6%
Revised 2012 Est.
18.4%
4.1%
subtotal
$16,032 x 25.0%
16,032
4,008
18.6%
4.6%
14.3%
subtotal
19.2%
1.0%
0.2%
Earnings before income taxes ... .. . . . . ....

Income taxes on continuing operations . . . . . .
15,189
3,392
Net earnings .. .. . ...... . .. . . . .. .... ....
$11 ,797
--$12,024
13.9%
--
FORECASTING STATEMENT OF CASH FLOWS

L04 Forecast
the statement of
cash flows.
14,672
86,357 x 4.4%
(3,800)
subtotal
(3,800)
computed as dividends per share

plug in balance sheet above
Decrease in long-term debt ... .. . . .... . .. . . .. .. . . ... . ..
current maturities via footnote
Purchase of treasury shares . .. . . . .. . . .. . .... . .... .... . . .
PG guidance to analysts
subtotal
subtotal
19.5%
1.0%
0.1%
15,818
831
202
subtotal
Ending cash ... .... . .. . . .... . ... .. . . ..... . ..... . .. . .
16,840
852
44
Operating income .. ........... . .... . .. . .

Interest expense .. . .. . ....... . . . . .. . ....
Other nonoperating income (expense), net .. .
$82,559
$86,357
$86,357
vesting activities
Capital expenditures .... .... .. . .. . ................ . . . .
$12,024
3,045
(374)
(48)
(242)
522
(77)
296
(16)
(458)
$139,41 9
subtotal
(see computation in text)
(see computation in text)
100.0%
49.4%
31.5%
t cash from operating activities .. .... . .. . .. .. . . .... .. . .
via forecasted income stmt.

21,293 x 14.3%
6,275 - 6,649
7,379 - 7,427
1'140 - 1,382
4,408 - 3,886
7,945 - 8,022
9,586 - 9,290
11,054 - 11 ,070
9,499 - 9,957
subtotal
from 2011 balance sheet
100.0%
49.9%
30.6%
$82,559
40,768
25,973
.
.
.
.
.
.
.
.
.
.
2012 Est.
67,694
$86,357
43,092
26,425
Net sales . .... . . ..... ........ . .. . . . . . . .

Cost of products sold ..... . ..... .. .. . . . ..
Selling, general and administrative expense . .
income ......... ..... .. .. . . .. . .... . .......... . ..

d: Depreciation and amortization . ... . ...... .... . .. ....
ange in accounts receivable .. . . ... . . . . ........ . .. .
ange in inventories .. .... . .. ... . . .. . . . . ......... ..
ange in deferred income taxes ..... . . . ... . . . . . . . .....
ange in prepaid expenses and other current . ............
ange in accounts payable . . ... .. . ... . . ..... . . .. .... .
ange in accrued compensation and other liabilities . ......
ange in deferred income taxes . .... ..... . ... . ....... .
ange in other noncurrent liabilities ... . ... .. ..... . . . ....
Net change in cash ... . .. . ... . .. . .. . .. ..... . . .... .. .. . .

Beginning cash . .. ... . . ... . ......... . . . . . . . . . .. ... ... .
Revised Forecasted Income Statement for P&G
($mllllons)
cess of Forecasting the Statement of Cash Flows

illustrate the forecasti ng of the statement of cash flows we again turn to Procter & Gamble .
ven its forecasted balance sheet in Exhibit l l .8A and its forecasted income statement in Exhibit
.SB, we prepare its forecasted statement of cash flows using the procedures for preparing the
tement of cash flow s expl2ined in Module 2 . Our forecasted statement of cash flows is in
hibit 11.9.
Forecasted Statement of Cash Flows for P&G
Total assets ......... . ... . . .. ..... .. . . . . .... .

Current Liabilities
Accounts payable . . .. . . ..... .. .. ... ........ ..
Accrued and other liabilities ......... .. . .. ......
Short-term debt (newly issued) . ... . . ....... . ...
Debt due within one year ... . . . . . .. ... . . . . .....
We forecast the statement of cash flows using the forecasted income statement and forecasted
balance sheet. We refer to the historical statement of cash flows mainly to check the reasonable-
(6,331)
4,621
(2,994)
(6,000)
(10,704)
168
2,768
$ 2,936
Forecasting Operating Activities We begin with the operating section and the forecasted net
earnings of $12,024 million, which we compute above. We, then, adjust net earni ngs for operating
expenses and revenues that do not impact cash , and for changes in current assets and liabilities. For
the first category we have depreciation and amortization , which are in SG&A expense and are added
back in the statement of cash flows because they do not use cash . (Computations for these expenses
are explained in our discussion of forecasting capital expenditures and PPE, and forecasting goodwill and other intangibles .) (Appendi x 11 A shows that Morgan Stanley also forecasts $422.3 million
of compensation expense related to stock-based compensation as an add-back to net income, as it
is a noncash expense; we are not privy to data that analysts had in making this estimate and do not
include it in our forecasts.)
For the second category we have four current assets and four current liabilities whose
cash-fl ow effects we must consider. For example, the forecasted increase in accounts receivable
reduces the available cash. We app ly this logic to each of the other current assets and li abi lities .
Thus, net cash flow from operating activities is forecasted at$ 14,672 million for 2012.
Forecasting Investing Activities The forecasted investing section reports cash expenditures for
short- and long-term investments as well as the purchase and sale of long-term operating assets. The
only item for P&G is the forecasted $3,800 million outflow for capital expenditures (CAPEX). We
11-30
11-31
discuss the computation of this amount in the section on forecasting capital expenditures and p
above. The remaining long-term assets are intangible and other nonoperating assets and we ass
no changes in those assets except for amortization of intangibles. Had we forecasted other chan
in those assets , we would include the cash flow effects in the investing section.
i:
'on ($10,826 million for FY2012 - $3,839 in prior-year current maturities+ $2,229 in FY2013
nt maturities).
Jn the stockholders ' equity section, we forecast a continuation of P&G's stated objective to
hase $6,000 million of treasury stock . Retained earnings is updated for forecasted net income
decreased by forecasted dividends. For the latter, we highlight the alternative method in this
pie, that is, to forecast dividends as a percent of forecasted net income . For P&G, our diviforecast for FY2012 is $6,333 or 52.7% of forecasted net income. Applying this percentage to
asted net income for FY2013, yields dividends of $6,633 million ($12,587 million X 52.7%).
After preparing the forecasted financial statements , it is useful to reassess whether they are reasonable in light of current economic and company conditions . This task is subjecti ve and benefits
from the forecaster's knowledge of company, industry, and economic factors . Many analysts
and managers prepare "what-if' forecasted financial statements . Specifically, they change key
assumptions, such as the forecasted sales growth or key cost ratios and then recompute the forecasted financial statements . These alternative forecasting scenarios indicate the sensitivity of a set
of predicted outcomes to different assumptions about future economic conditions. Such sensitivity esti mates can be useful for setting contingency plans and in identifying areas of vulnerability
for company performance and condition.
ust Forecasted Statements Our initial balance sheet yields estimated total assets of
41,264 million and total liabilities and equity of $132,664 million , indicating a financing need
$8,600 million . This represents an increase of $3 ,979 mm ion over the $4,621 million we foreted for FY2012.
Our estimate of interest expense begins with our FY2012 forecast for total interest-bearing debt
$33 ,641 million ($4,621 million+ $10,826 million+ $18,194 million). This debt will decrease
scheduled payments of $3,839 million and increase by new borrowings of $3 ,979 million .
suming that these payments and borrowings (netting to an increase of $140 million) occur ratably
er the year and that the borrowing rate continues at 2.6%, our estimate for interest expense is $876
'lion ([$33 ,641 million + ($140 million/2)] X 2.6%). And, given our estimated cash balance of
,071 million and a I .5% investment rate, our estimate of interest income is $45 million ([$2,936
'Ilion+ $3,071 million]/2 X 1.5%).
Our forecasted income statement and balance sheet is presented in Exhibit 11.l 0 (FY2012
recasts are shown in the first column) . Given our forecasted nonoperating revenue (expense) ,
project pretax income at $16,783 million . Assuming a continuation of the 25 % effective tax
te , we forecast tax expense of $4,196 million ($16,783 X 25 %) and net income of $12,587
'Ilion. Exhibit 11.10 also reports the two-year-ahead forecasted statement of cash flows which
prepared using the forecasted FY2013 and FY2012 balance sheets and our forecasted FY2013
come statement. The Morgan Stanley forecast spreadsheet which we reproduce in our Appendix
IA provides forecasts through FY2014 using similar methodology.
Forecasting Financing Activities The forecasted financing section includes forecas

items that impact long-term nonoperating liabilities and equity. We forecast a reduction of lo 1e4
term debt in the amount of $2,994 million relating to its contractual maturities. Those maturi~gr
are reported as part of debt due within one year on the 2011 balance sheet and we assume
all contractual obligations are paid as agreed .
This concludes our initial forecasts of the financial statements for Procter & Gamble
Appendix 11 A reproduces an actual analyst forecast of P&G 's financial statements from Mor~
gan Stanley, which applies the percent of revenues approach that we describe. (Module
13
estimates the val ue of P&G's stock using our forecasts and compares our estimate to one that
Oppenheimer develops from its forecasts and valuation model.)
ADDITIONAL FORECASTING ISSUES

Reassessing Financial Statement Forecasts
Multiyear Forecasting of Financial Statements

L05 Prepare
multiyear forecasts of
financial statements.
Many business decisions require forecasted financial statements for more than one year ahead.
For example , managerial and capital budgeting, security val uation , and strategic analyses all
benefit from reliable multi year forecasts. Modules 13 and 14 use multi year forecasts of fi nancial
results to estimate stock price for investment decisions .
Forecasting the Income Statement We forecast two years ahead using the assumptions for
our one-year-ahead forecasts and adjust those assumptions as necessary. To illustrate , we forecast
P&G 's 2013 sales as $90,329 million , computed as our forecasted FY2012 sales of $86,357 million
X 1.046, the growth rate we used for FY2012. Operating expenses are forecasted from this sales
level using the methodology we describe earlier for one-year-ahead forecasts . As before, we compute nonoperating income (expense) after we estimate nonoperating liabilities and, given our estimates of nonoperating revenue (expense), we compute pretax income, tax expense and net income.
Forecasting the Balance Sheet Assuming a continuation of the percent-of-revenues relation for current assets and li abilities, we can forecast current assets and current liabilities applying the same methodology used for one-year-ahead forecasts. For example, FY2013 accounts
receivable are forecasted as $6,955 million , computed as $90,329 million X 7 .7% (the same
percentage we used to forecast FY2012 receivables). Similarly, we forecast CAPEX at $3,974
million ($90 ,329 x 4.4%) and depreciation expense at $3,153 million ($22,048 in FY2012
PPE, net X 14.3% depreciation rate used previously). Forecasted net PPE is , then, equal to
$22,869 million (computed as $22 ,048 million + $3,974 million - $3,153 million) .
Operating liabilities are estimated using the same percent of estimated sales that we use in
FY2012. The long-term debt footnote (presented above) reveals that contractual maturities of
long-term debt for FY2013 are $2,229 million, and we forecast long-term debt at $15 ,965 million
($18,194 million - current maturities of $2,229 million). As before, we assume that contractual
maturities of long-term debt that were scheduled for FY2012 have been paid. Consequently, we
forecast debt due within one year (which includes current maturities of long-term debt) at $9,216
Forecasted Two-Year-Ahead Financial Statements for P&G

2012 Est.
2013 Est.
sales
t of products sold . . ... . .. .. . . .. . . . . ... . . .. . . . .
lling, general and administrative expense .. ... . . .. . .
$86,357
43,092
26,425
$86,357 x 1.046
90,329 x 49.9%
90,329 x 30.6%
$90,329
45,074
27,641
rating income . . .. .. .. . .... . .. . ... . . . . . . ... . . .

erest expense . . . ... .. . . . . . . . . . . . . .. . . . . .. . .. . .
her nonoperating income/(expense), net .. .... . . . . . .
16,840
852
44
subtotal
computed
computed
17,614
876
45
nings before income taxes .. . . . . .. . .. . . . . . . .... .

ome taxes on continuing operations . .... . .. . . ... . .
16,032
4,008
subtotal
16,782 x 25.0%
16,783
4,196
urrent assets
ash and cash equivalents . . . . . . . . . .. . . . . . . . . ... . .
ccounts receivable ... ... . ... . .. . . .. . . . .. ...... . .
Inventories . . . ...... . . . . .. ... . .. .. . .. . .. .
Deferred income taxes .. ... . . . .. ... ........ . .. . . . .
Prepaid expenses and other current assets . .. ...... . . .
---
$12,024
subtotal
$12,587
2012 Est.
2013 Est.
$2,936
6,649
7,427
1,382
3,886
90,329
90,329
90,329
90,329
90,329
x
x
x
x
x
3.4%
7.7%
8.6%
1.6%
4.5%
$3,071
6,955
7,768
1,445
4,065
Total current assets . . .... .... .. . .. .... . ... ...... .

Net property, plant and equipment . .. ..... . .. . . .. . . .
Goodwill and other intangible assets
Goodwill . . .. . . . . . . . . ...... ...... . .. . . . . . .. . . . . .
Trademarks and other intangible assets, net .. . .... . .. .
22,280
22,048
subtotal
22,048 + 3,974 - 3,153
23,304
22,869
57,562
32,620
no change
no change
57,562
32 ,620
Net goodwill and other intangible assets. . . . . . . . . . . . . .

Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,182
4,909
no change
no change
90,182
4,909
Total assets. . . .... ... . .. . . . . .... . .... ... . . . . . .. . $139,419
subtotal
$141 ,264
continued
11-32
11-33
continued from prior page
I EXHIBIT 11 .10
Forecasted Two-Year-Ahead Financial Statements for P&G
Balance Sheet-continued ($ mllllona)
Following is financial statement information from Colgate-Palmolive Company.

2012 Est.
Current liabilities
Accounts payable .. . . . .. . .. . .. . . .. . .. . . . . . . . .. . . .
Accrued and other liabilities .. .. . .. .. .. ... . . . . . . ... .
Short-term debt ... . .. .. .. . .. .. . . ... . .... . . .. . . . .
Debt due within one year .. .... ... ... ...... . .... . .
$ 7,945
9,586
4,621
10,826
Total current liabilities . .. .......... . . . .... . . . .. . ..

Long-term debt .. ........ . . .. .... . ...... . . .. . .. .
Deferred income taxes .... .. .. . . . .. .. ... . . .... ...
Other noncurrent liabilities .... .. .. . .. . ... .. . . .. . .. .
32,978
18,194
11 ,054
9,499
18,194 - 2,229
90,329 x 12.8%
90,329 x 11 .0%
Total liabilities . . .. . ....... . . . .. .. ... . ... . ...... . .

Preferred stock .. .. .... ... . . ... .... .. .. . . ... . . . .
Non-Voting Class B preferred stock ... .. . .. . . ... . . . .
Common stock ... .. .. .... . . . . .... . . .. . .. .. .. . ..
Additional paid-in capital ... . .. . . . ... . .. .... ... ... .
Reserve for ESOP debt retirement .... .. . . . . . . . . . ... .
Accumulated other comprehensive income (loss) . . .. . . .
Treasury stock . . .. .... . . . . .. .. . ........ . .. . . . .. .
Retained earnings ..... . .. . ............... ...... .
Noncontrolling interest .... . . . ..... . .... .. . . . . .. ..
71 ,725
subtotal
1,234
0
4,008
62,405
(1 ,357)
(2,054)
(73,278)
76,375
361
no change
no change
no change
no change
no change
no change
Total shareholders' equity . ... .. ... ....... . ...... . .
90,329 x 9.2%
90,329 x 11.1%
plug
10,826 - 3,839 + 2,229

subtotal
Income Statement
year ended December 31 ($ millions)
$ 8,310
10,027
8,600
9,216
36,153
15,965
11 ,562
9,936
73,616
no change
1,234
0
4,008
62,405
(1,357)
(2,054)
(79,278)
82,329
361
67,694
subtotal
67,648
Total liabilities and shareholders' equity ... . . . .. .. .... . $139,419
subtotal
$141,264
Statement of Cash Flows

Operating activities
Net income ... ... ... . .......... .... .. . . .. .... . . .
Add: Depreciation and amortization .... . ..... ..... . . .
Change in accounts receivable . . .... ... . . .. .. . .. . . .
Change in inventories . .. . . .......... . . . . .. ....... .
Change in deferred income taxes ... . .... . . .. ... . . . .
Change in prepaid expenses and other current .. .. . .. . .
Change in accounts payable . ... ... . . .. .. .. . . . . . .. .
Change in accrued compensation and other liabilities .. .
Change in deferred income taxes .. . . . . .. .......... .
Change in other noncurrent liabilities . . ... .. . ... ... . .
Net cash from operating activities .. . . . . .. .. . . .... .. .
Investing activities
Capital expenditures .... .. ...... . ... .. . . ........
(73 ,278) - 6,000

76,375 + 12,587 - 6,633
2012 Est.
$12,024
3,045
(374)
(48)
(242)
522
(77)
296
(16)
(458)
via forecasted income stmt.
14,672
22,048 x
6,649 7,427 1,382 3,886 8,310 10,027 11 ,562 9,936 -
14.3%
6,955
7,768
1,445
4,065
7,945
9,586
11 ,054
9,499
subtotal
2013
$12,587
3,153
(306)
(341)
(63)
(179)
365
441
508
437
16,602
(3,800)
90,329 x 4.4 %
(3,974)
Net cash from investing activities ... .. ..... . . .. .... . .

Financing activities
Dividends . . ... .. .. .. ........ . . .. ... .. .. . .. . .. . .
Increase in short-term debt . . .. ... . ... . .. . .... .. . . .
Decrease in long-term debt . . .. . . . ... .. . . . .. . . .. ..
Purchase of treasury shares . ... .. ..... ..... . ... . . . .
(3,800)
subtotal
(3,974)
(6,331)
4,621
(2 ,994)
(6,000)
$12,586 x 52 .7%
plug
current maturities via footnote
subtotal
(6,633)
3,979
(3,839)
Net cash from financing activities .... . ... . . . . ... ... .
(10,704)
subtotal
Net change in cash .. . . .. . .. . . . .. . . . .... .... . ... . .

Beginning cash . .... ... . . . . .. ... .... ... ... .. . . .. .
168
2,768
Ending cash ... .... . . .... ............ . . . . ... .. . .
$ 2,936
subtotal
from balance sheet
subtotal
~
(12,493)
135
2,936
-==
$ 3,071
2010
. . . . . ... . ... . .. .... . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,564
2009
6,360
15,327
6,319
Gross profit. . ..... .. ... .. ... . . ....... . ... .

Selling, general and admir11strat1ve expenses . . . . : : : : : : : : : : : : : : : : : : : : : : : : : : : :
Other (income) expense, net . .. ... .. . .. .. ... . . .. ... . .. . .. ...... . ... . . .. . .
9,204
5,414
301
9,008
5,282
111
Operating profit . ... . ... . ... . ... ... ... . . . .. .. . .. .. ..... .. ...... ....... .
Interest expense, net ..... ... .. ..... .. . .. . .... . .... . . ... . . . ... .. .. ... . .
3,489
59
Income before income taxes

Provision for income taxes .. : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :
3,430
1,117
Net income including noncontrolling interests . . ...... . ...... ......... ... .. .. .

Less: Net income attributable to noncontrolling interests . . . . ... . .... .. . .... . . . .
2,313
110
- --
Net income attributable to Colgate-Palmolive Company ...... . ... . .... .. .. .. .. . $ 2,203
3 ,615
77
--3,538
1,141
2,397
106
--$ 2,291
Balance Sheet
As of December 31 ($ millions)
2010
Assets
Cash and cash equivalents ....... . ... . .. . . . .... . ... ...... .. . . .
Receivables (net of allowances of $53 and $52, respectively) . .. . ..... .
Inventories . .. .. .. .. . ...... .. . .. . . .. .. ... . . . ...... .. . . ... .. .
Other current assets .. .. ..... ... .. ... . .. ... . . .... .... . . . . . . . . .
Total current assets . . . .. .... . .. ... . . . . . .
Property, plant and equipment, net . ... .. . .. : : : : : : : : : : : : : : : : : : : :
Goodwill , net ... . . .. ....... . .. ... .. . ..... . . . .. ... . .. .. . . . ..
Other intangible assets, net .... ... . ... . .. . .. .. ..... . . .. .. . ...
Other assets . . .. . . ... ... . . .. .. . . .. .. . . ... . ........ . . . .. . . ..
490
1,610
1,222
408
2009
600
1,626
1,209
375
3,730
3,693
2,362
831
556
3,810
3,516
2,302
821
685
Total assets ... . . ... . .. . .. . . .. . ... ... ..... .. . .. . .... . . . . ... . .
$11,172
$11 ,134
:
.
.
Liabilities
Notes and loans payable . .. ....... . .. . ... .. .............. . . . . .
Current portion of long-term debt . ..... . ... . ... . . .. ... . . . . .....
Accounts payable .... . . . ....... . . ... .. .. ......... ...... ... .. .
Accrued income taxes .. . . . . . .. . . . .. . . .. .. .. ... ..... . . . . . . . .. .
Other accruals .. ... . ... . . .. ... . . .. . .. . .. .. .. . .. . . .... ..... .
Total current liabilities ... ..
Long-term debt ..... .. ..
Deferred income taxes ....
Other liabilities . .... .. ...
. .. ... . . . . .. . . .... . . . .... . .. .. ... . .

. .. .. . .. . ....... ..... . . . . .... ... . .
. ... . . ... . . . . ... .. . . . . . ... . .... .. . .
. . . . . ....... . .. . . . ... ..... . .........
48
561
1,165
272
1,682
35
326
1,172
387
1,679
3,728
2,815
108
1,704
3 ,599
2,821
82
1,375
8,355
7,877
Total liabilities ..... . . ... .. . .. .. ... . . .. . .. ........ . .. .. .. .. .. .

Commitments and contingent liabilities
Shareholders' Equity
Preference stock . . . . . . .. ... ....... . ... . . . . .. ... . .
Common stock, $1 par value (2,000,000,000 shares authori~~d . . .... . .
732 ,853,180 shares issued) . ..... .. . .... . .... . ....... . .... . . .
Additional paid-in-capital ..... .... .. . ..... .
Retained earnings . .. .. .. .. ..... . .... .. . . : : : : : : : : : : : : : : : : : : : :
Accumulated other comprehensive income (loss) ..... . .. ... .... ... .
169
733
1,132
14,329
(2,115)
733
1,764
13,157
(2,096)
Shareholders' equity before unearned compensation ,

treasury stock and noncontrolling interest ....... .. . . . ... . . . .. . . .
Unearned compensation .. . . ... .. . . .. . .... . . . .. .. ... .. ... . ...
Treasury stock, at cost .... . . . . .. .. . .. ... .. . ... . ...... .... .. . . .
14,079
(99)
(11,305)
13,727
(133)
(10,478)
Total Colgate-Palmolive Company shareholders' equity . . .. . .. .. . ... .

Noncontrolling interests .. . ...... . . . .... ..... . .... .. ... . .. ... . .
2,675
142
3,116
141
Total shareholders' equity . . . ...... .. .. .. .. . . ... . .. . . ... . .... . .

Total liabilities and sharehold ers ' equ ity .. ... . .. . .. . . ... . . . .... ... .
2,817
3,257
---
---
$11,172
$11 ,134
11-34
11-35
arsimonious Method for Forecasting
Required
ur parsimonious approach to forecast NOPAT and NOA req uires three crucial inputs:
Forecast the Colgate-Palmolive balance sheet, income statement, and statement of cash flows
for 2011 using the following additional information; assume no change for all other accounts not
listed below. All percentages, other than sales growth, are based on percent of revenues; assume
all capital expenditures are purchases of PPE, and that depreciation and amortization are included
as part of selling, general and administrative expenses.
Key Financial Relations and Measures ($ mllllons)
2010
Net sales growth ..... . . . .. ... .. .. ...... . ... . . . ... . .. . . . . . .... . . ... . . ... ..
Cost of sales/Net sales .. . . . .. . . . .. . . . ... . . . . .. . . . . . .. . .. . ..... .. . . . . . . .... .
Selling, general and administrative expenses/Net sales . . . . ... . . . . .... . . . . . . . . . . . . .
Depreciation for 2011 . .. .. . . ... . .... .. ..... . . . . . . . . . ....... . .. . . . . ... . ... . . .
Amortization for 2011 . . . . . . ... .. ... ............... .. .. . .. . ... . .... .. .. ... .
Other (income) expense, net . .. . . .. .. . ... .. . . . .. . .. ..... . .. .. . .. ... . .. .. . ... .
Interest expense, net . . . . ...... ... .. . .. ... . .... . .. ......... . .. .... . . .... . . . .
Provision for income taxes/ Pretax income . . . . ........ .. .. ... . .. ... . . . . .... .. ..
Net income attributable to noncontrolling interests . . . ... .. ..... . . . . . ... . ....... . . .
3%
40.9%
34.8%
$375
$19
$301
$59
32.6%
$110
Cash and cash equivalents/Net sales ........ . . . . . . . .. ... . . .. ...... .. .. .. . . .. . .

Receivables / Net sales .. ........ .. .... . . . . ..... .. . .. .... . . ..... . . . ...... .. . .
Inventories/Net sales . ....... . . . .. ... .......... . ... . .. . . . . . .... . .... . .. . .. . .
Other current assets/Net sales . .. . .. .... . . . . . . . .. . . . .. . .... . . .. ....... . .... . . .
Capital expenditures for 2010 .. . .. . . . ... . .... .. . . .. . . . . .. . .. . ............. .
Goodwill , net .. . . .. ....... . ... . . .. .. . . . ... .... . .. ... .. .. . . . ... . .. ... ..... .
Other assets/Net sales ... . .. . ......... . . . . .. .. .......... . ...... . .. .. .. .. ... .
Notes and loans payable . . .. .. . .. . . . .. .. .. .... . .. . . .. . .. .. . . . . ..... . ... . ...
Accounts payable/ Net sales .. . ..... . ........ .. .. . . . . .. .... . . . ... . . . . . . ... .. .
Accrued income taxes/ Provision for income taxes . . . ... . .. .. .. ... .. . ... . ...... .. .
Other accruals/ Net sales .. . . . .. . . .. . . .. . ... . . .. . . . . . .. .. . . ... . . . . ... . .. ... . .
Deferred income taxes ....... . . . . . . .. . ........... . .. .. .. . . . .. . .. . . ... . . . ...
Other liabilities/ Net sales .. .. . . . .. . . .. . . . ...... .. . . . .. .. . .... . . . .. .. .... . . . . .
Preference stock . . . . .. . . . . . .......... . . . . . . . .. .... . .. ... .... . . ... . . . . . . . . .
Common stock ... . .... . . . . . . . . ........... . .. .. .. . .. . . .. . . . ... . ... . ... .. . . .
Additional paid-in-capital ........ . . . ... . . . ... . .. . . . .. . .. .. .. . . . .... . ... . . . . . .
Accumulated other comprehensive income (loss) . . .. . .. . .. . .. . . . . . . . . .. ... . . . . . . .
Unearned compensation . . . .. .. . . .... . ... . . . .. . . . . ... . .. . ................ .. .
Treasury stock, at cost ... . ..... ... . . . .. . . . . ......... . . . . . .. . . . .. . . ......... .
3.1 %
10.3%
7.9%
2.6%
$567
$2,362
3.6%
$48
7.5%
24.4%
10.8%
$108
10.9%
$0
$733
$1,132
$(2 ,115)
$(99)
$(11,305)
Noncontrolling interests ...... . ... . ..... .. . . ..... .. .. . . .. . . .. .... . . . . . . . .. . . .
$142
Dividends/Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52 %
Long-term debt payments required in 2012 .. . ...... . .. .. . ... . . ...... . . .... . .. . . .
$359
Sales growth
z.
Net operating profit margin (NOPM); defined in Modul e 3 as NOPAT divided by sales
3. Net operating asset turnover (NOAT); defined in Module 3 as sales divided by average NOA.
For forecasting purposes, we define NOAT as sales divided by year-end NOA instead of average NOA because we want to forecast year-end values.
Multiyear Forecasting with Parsimonious Method

e remainder of thi s module describes and illustrates this parsimonious approach . To illustrate ,
we use Procter & Gamble 's 2011 income statement, from Exhibit 11.3 , and its 2011 balance
beet, from Exhibit 11.6, to determine the following measures. We assume that P&G 's statutory
sax rate is 37% on nonoperating revenues and expenses.
2011'
les ................ . . .. ... .....
et operating profit after tax ($15,818 A (($138,354 - $2,768) - ($27,293 NOPM ($12, 193/$82,559) ....... .. . ..
NOAT ($82,559/$97 ,24 7)* . . .. . . ... . ..
. .. . ...... . ...... . .. . . . . .... . .. .. ..... . .. .. .. .

{$3,392 + (($831 - $202) x 37%]} ....... . . . ....... .
$9,981) - $11 ,070 - $9,957)" .. . . . ... .. ... . . . . . . . . .
. .......... . .... . . . ..... . . . . . .. .. .. . . . . . . .. .. . .
. ... . .. . ....... . .. .. ....... ..... .. . . ..... .. ... .
$82 ,559
$12,193
$97,247
14.8%
0.85
*We use ending balance sheet amounts rather than average amounts because we forecast ending balance sheet amounts.
Using these inputs, we forecast P&G 's sales , NOPAT, and NOA. Each year's forecasted sales is
the p:ior-ye~ sales m~ltipl ied successively by ( 1+ Growth rate) and then rounded to whole digits.
Consistent with our pnor revenue growth rate assumptions for P&G , we define " 1 + Growth rate"
8:5 1.046 for 2012 and onward. NOPAT is computed using forecasted (and rounded) sales each year
times the 2011 NOPM of 14.8%; and NOA is computed usingforecasted (and rounded) sales divided
~y the 2011 ~OATof.0.85 . Forecasted numbers for2012 through 2015 are in Exhibit 11.11 ; supportmg computations are m parentheses.
This forecasting process can be continued for any desired forecast horizon . Also, the forecast
assumptions such as sales growth , NOPM , and NOAT can be varied by year, if des ired . This alternative, parsimonious method is much si mpler than the primary method illustrated in this module.
However, its simplicity does forgo information that can impact forecast accuracy.
Procter & Gamble Multiyear Forecasts of Sales, NOPAT and NOA
Forecast
Reported ~~~~~~~~~~~~~~~~~~~~~~~~_J
The solution is on page 11-72.
PARSIMONIOUS MULTIYEAR FORECASTING

L06 Implement
a parsimonious
method for multiyear
forecasting of net
operating profit and
net operating assets.
The forecasting process described above uses a considerable amount of available information
to derive accurate forecasts. We can, however, simp lify the process by using less information.
Stock valuation models commonly use more parsimonious methods to compute mu ltiyear fo recasts for an initial screening of prospective securities. For example, in Modules 13 and 14 we
introduce two stock valuation models that use parsimonious forecasting methods. One model
utilizes forecasted free cash flows and the other uses forecasted net operating profits after tax
(NOPAT) and net operating assets (NOA ); see Module 3 for description s of these variables.
Because free cash flow s are equal to net operating profits after tax (NO PAT) less the change in
net operating assets (NOA), we can accommodate both stock valuation models with forecasts
of NOPAT and NOA .
2011
2012 Est.
4.6%
4.6%
4.6%
4.6%
Net sales (unrounded) . .
$82 ,559
$86,356.71
$90,329.12
$94,484.26
($82,559 x 1.046)
($86,356. 71 x 1.046)
($90,329.12 x 1.046)
Net sales (rounded) . . . .
$82,559
$90,329
NOPAT1 . .
.. .... .... ..
$12,1 93
$86,357
$12,781
$13,369
$94,484
$13,984
$98,830.54
($94,484.26 x 1.046)
$98,831
$14,627
($98,831 x 0.1 48)
NOA2. . . . . . . . . . . . . . . .
$97,247
2015 Est.
($90,329 x 0.148)
($94,484 x 0.148)
$106,269
$111,158
$116,272
($86,357/0.85)
($90,329/0.85)
($94,484/0.85)
($98,831/0.85)
Forecasted NOPAT
Forecasted NOA
Forecasted net sales (rounded)/ 2011 NOAT
2014 Est.
$101,596
($86,357
x 0.148)
2013 Est.
Forecasted net sales (rounded} x 2011 NOPM
11-36
1 1-37
ANALYZING GLOBAL REPORTS

There are no differences in forecasti ng financial statements prepared under IFR S versus U.S
GAAP. Wh il e factors influencing gr?"':th rates likely differ amon~ cou~tri~s across the globe.
the method we use to assess growth 1s independent of the accounting pn nc 1ples applied. S im~
1
larly, the forecasting techniques and mechanics we describe in thi s modu le can be applied t0
any set of fi nanc ia l stateme nts.
Morgan Stanley
MORGAN STANLEY
NORTH
RESEARCH
AMERICA
Morgan Stanley & CO. LLC
Dara Moheenlan, CFA

Dara.Mohsenlan@morganstanley.com
+1 212 761 6575
Ruma Mukerjl, CFA

Ruma.MUkerjl@morganstanJey.com
+1 212 761 6754
MODULE-END REVIEW
Johnson & Johnson (J&J) reports fiscal 2010 sales of $6 1,587 mi llion, net operating profit after tax
(NOPAT) of $13,065 mi ll ion, and net operating assets (NOA) of $45,694 mi ll ion . J&J's NOPM is computed as 21% ($13,065 rnillion/$6 1,587 mi ll ion) and its NOAT is computed as 1.35 ($61,587/$45 ,694).
Required
Use the parsimonious forecast model to project J&J's sales, NOPAT, and NOA for 201 l through 20 14
assuming a sales growth rate of 4%.
The solution is on page 11-74.
AP P E N D IX 11 A
Morgan Stanley's Forecast Report on

Procter & Gamble
Morgan Stanley analysts deve loped their forecasts of P&G shortly after attending the analyst meetings held by
P&G management. We completed our ana lysis and developed our forecasts at about the same time . Thus, we have
an opportunity to compare the analysis in th is module with the Morgan Stanley analyst report. Following is the
Morgan Stan ley analysts ' report on Procter & Gamble Co. that the firm issued on August 7, 20 11 (Pages 9-14 of the
report contain the customary disclosure information typical of analyst reports). Please note that materials that are
referenced comprise excerpts from research reports and should not be relied on as investment advice. This material
is only as current as the publication date of the underlying Morgan Stanley research. For important disclosures,
stock price charts, and equity rating histories regarding companies that are the subject of the underlying Morgan
Stanley research, see www.morganstanley.com/researchdisclosures. Additionally, Morgan Stanley has provided
their materials here as a courtesy. Therefore, Morgan Stanley and Cambridge Business Publishers do not undertake to advise you of changes in the opinions or information set forth in these materials.
Kevin Grundy, CPA
August 7, 2011
Kevln.Grundy@morganstanley.com
+1 2127613645
Procter & Gamble Co.

Raising 2012e EPS Despite
Low Quality 04
What's New : PG reported low-quality 04 EPS , but the
stock ended up outperforming the S&P 500 as we
believe investors are appropriately looking ahead to an
improved pricing/commodity cost scenario in 2012,
particularly with stronger than expected 3% 04 pricing
ex-mix (MS was at +1.3%). In addition , FY12 guidance
was in-line with consensus. Net, we were not enthused
by 04 results given the low quality nature of 04, and a
weak developed market consumer, as well as continued
commodity pressure drove below consensus 01
guidance, but we think the worst is now behind PG with
improving pricing and declining spot commod ity costs,
and believe undemanding valuation of 13.2 times FY13e
EPS is compelling, particularly with the market adopting
a more defensive orientation .
In-line but low quality 04: 04 EPS of $0.84 was above
our $0.81 estimate and the $0.82 consensus, but was
boosted 2 cents by a lower than expected tax rate and 3
cents by higher than expected other non-operating
income. PG 's 5% organic sales growth result (+4%
excluding pre-buying ahead of price increases) was
solid , but higher than expected SG&A drove a 3%
operating profit miss vs. our forecast and 4% miss vs.
consensus. Segment profit results were also weak , up
only 4. 7% y-o-y despite an easy -11 .1% comparison,
while pretax profit was aided by a 60% y-o-y corporate
expense decline
Alleon M. Un, CFA

Allson.Un@morganstanley.com
+1 212 761 7250
Key Ratios and Statistics

Reuters: PG.N Bloomberg : PG US
Household & Personal Care I United States of America
Price target
$69.00
Shr price, close (Aug 5, 201 1)
$60.59
Mid cap, curr (mm)
$180,415
$67.71-59.17
52-Week Range
Fiscal Year ending
06/1 O
06/11
06112e
06f13e
ModelWare EPS ($)

Prior ModelWare EPS ($)
3.67
3.95
3.92
4.20
4.15
4.59
4.59
PIE
Conaenaua EPS ($)
16.3
4.11
3.0
16.1
3.93
3.1
14.4
4.28
3.5
13.2
4.58
3.9
Div yld (%)
Unless otherwise noted, au metrics are based on Morgan Stanley ModelWare

framework (please see explanation tater Jn this note).
I .. Consensus data Is provided by FactSet Estimates.
Morgan Stanley Research estimates
Quarterly ModelWare EPS

Querter
2010
01
0.97
1.10
0 .89
0.71
02
03
Q4
2011
2011
Prior Current
20128 2012
Prior Current
1.02
1.13
0.96
1.1 8
1.05
0.84
0.93
1.04
Morgan Stanley Research estimates
FY12 guidance OK: PG guided to $4.17-4.33 (current

consensus at $4.26) in FY12 EPS , up 6-10% y-o-y
(+8-1 2% excluding a higher tax rate), on +3-6% organic
revenue growth. However, 01 guidance of $1 .00-1.04
was below the $1 .14 consensus.
Raising FY12e EPS: We are raising our FY12e EPS
slightly to $4.20 from $4.16 solely on a lower than
expected tax rate. On an operating basis, 04 downside
is offset by a more favorable pricing/cost outlook for
FY12. We are also lowering our price target slightly to
$69 (1 5x 2013e EPS of $4.59) from $72 to reflect a
lower market multiple.
Morgan Stanley does and seeks to do business with

companies covered in Morgan Stanley Research. As
a result, investors should be aware that the firm may
have a conflict of interest that could affect the
objectivity of Morgan Stanley Research. Investors
should consider Morgan Stanley Research as only a
single factor in making their investment decision.
For analyst certification and other Important

disclosures, refer to the Dlaclosure Section
'
located at the end of this report.
11-38
11-39
Morgan Stanley
MORGAN
STANLEY
RESEARCH
Morgan Stanley
MORGAN
Risk-Reward Snapshot: Procter & Gamble (PG, $60.59, Overweight, PT $69)

Potential Long-Term Topllne Reacceleratlon
Why Overweight?
LT Top line Re-Acceleration: We
expect PG 's organic sales growth to
re-accelerate to 4.5% over the next
few years from 3% in F2008-11 , aided
by greater emerging markets focus.
70
Net Pricing/Cost Pressure Gap

Eases: With improving pricing trends
despite commodity cost pressure, we
expect PG 's net commodity cost vs.
pricing gap to ease to +1% of EPS in
FY12e, versus -1 0% in FY11e.
60
50
40
M ~~~~~:::!!~~~llill...1111111.W
Aug-10
Feb-10
Aug-09
Base Case (Aug- 12)
Base
Case
$69
Bear
Case
$53
CU'rent Stock Price
Based on 15x F2013e EPS, below PG's five-year historical NTM P/E
average of 16.Sx.
Price Target: $69

Bull
Case
$83
Feb-12
Aug-11
feb-11
Historical Stock Perfonnance
Topllne rebounds to 6% organic sales growth. Revenue upside

as PG 's reinvigorated topline focus drives outsized market share
gains and a macro rebound is stronger than expected. Cost cutting
trims 50 bps from SG&A. Valuation expands to 17x C2012e EPS.
17x
F2013e
Bull Case
EPS, of $4.90
15x
F2013e
Base Case
EPS of $4.59
Rebounding organic sales growth. Organic sales growth of 4.4%

through F2013, driven by emerging markets, higher marketing
spending, and PG strategy changes. Average operating margin
expansion of -40 bps through F2013. Valuation expands to 1Sx
F2013e EPS (10.2 times EV/EBITOA}.
13x
F2013e
Bear Case
EPSof$4.09
Topllne downside. Pricing is 100 bps below our forecast due to a

competitive environment and the macro rebound is slower than we
expect, hurting volume by 200 bps. Margins miss by 50 bps due to
negative mix. Valuation contracts to 13x F2013e EPS.
Bear to Bull : Competitive Environment and Macros Are the Key Drivers
100
90
80
70
60
50
40
Macros Could Disappoint: PG is

sensitive to macro conditions given its
skew to premium products, as each
100 basis point volume change drives
an estimated 2% EPS impact.
Operating profit miss driven by higher than expected

SG&A: Gross margin of 48.3% was down 120 bps YoY, and
was - 60bps below consensus (in-line with our forecast) .
However, higher than expected SG&A expense as a % of
sales resulted in a 4% operating profit miss versus consensus
(3% vs. our forecast) , which was more than offset by other
non-operating income and a lower than expected tax rate,
which in aggregate added 5 cents to EPS, driving more than
all of the EPS upside. PG did disclose full-year ad spending
was 40 bps higher than our forecast (PG does not disclose ad
spend on a quarterly basis) , which does mean FY EPS is
higher quality. Please refer to Exhibit 1 and Exhibit 2 for more
detail on the quarter's variance versus our forecast.
Pricing: We expect improved HPC

industry pricing going forward, but if
competition remains heightened, we
estimate that each 100 bps of pricing
pressure has a 5% EPS impact.
.......
+I0.2'%
...,,.,
-_ --...
-""
Gro. . Proftt
Gross Margin %
10,043.8
123
l!lojiiiiiO
.,...
...... sn
.,
0
50 bps
margin miss
200 bps
100 bps
due IO mix
miss from
""'"""
topline
pricing risk
macro
downside
Base
Case
SO bps
volume
from
SG&A
50bps lower
SO bps
SO bps
volume
upside from
share gains
pricing
upside
Bull
Case
$11,929.0 $20,880.0
4.7%
10.2%
4.0%
5.0%
EPS Dllutad (Core)

EPS %G ~h
0.3"'
9 ,38&.0
(56) bps
49.5%
$0.00
$0.20
$0.40
$0.60
llS 4011 Eat.
$0.80
$1 .00
Sll.81
lo.Q1
Gross Profit
SG&A Expense
-0.04
1003
Non-Operating
Income
Tax Rate
4011 Actual
EPS
SO 84
Source: Company data, Morgan Stanley Research
Q4 segment pretax profit results were weak: As shown in
Exhibit 3, lower than expected revenue growth in grooming

was offset by upside in baby/family. Each segment missed
consensus profit estimates, except baby/ family, and total
segment profit in aggregate was up only 4.7% y-o-y on an
easy -11 .1% comparison, offset by lower corporate pretax
expense, which declined 60% y-o-y.
Exhibit 3
Segment Results - MS vs. Actual
Toteil Sal..
Volume (Organic)
Pricing
Mix
FX Impact
S
ent Pretax Profit
...........AZoi...
$20,812.0 $20,880.0
5.0%
5.0%
4.5%
1.3%
-0.8%
5.0%
$3
na.a
3.0%
3.0%
-1.0%
5.0%
$3 492.0
$8,238.9
$6,144.0
0.2%
(4) bps
(152) bps
171 bps
(22) bps
0 bps
-7.6%
$18,926.0 $20,HO.O
10.2%
100bp
4.0%
5.0%
8.0%
-1 .0%
'"3.0%
3.0%
3.0%
-1.0%
1.0%
$3 336.0
5.0%
S3 492.0
-1.5%
-300bp
$5,552.0
$8,144.0
10.7%
1.0%
4.0%
-2 1.3%
$965.0
$3,502.0
$937.0
$4,050.0
300bp
-2.9%
-500bp
400bp
200bp
400bp
4.7%
10.2%
7.5%
(120) bps
32.S...
(198)bp0
1
3,285.0
15.7%
11 .4%
16bps
sn
........
(56) bps
2,950.0
15.6%
11 .4%
7.0%
4.0%
$1,190.4
$937.0
$4,050.0
10.0%
$798.0
$3,974.2
7.5%
$664.9
A,11t.8
5.0..
1815.5
~
1.0..
sioe.o
....
2.1%
250bp
20.0%
IA
ll2,Ml.8
7.0..
200bi>
5.0%
10.0%
13.9%
500bp
$571 .0
$798.0
39.8%
U.1%
fiOOllp
......
2.0..
1542.0
11 .9%
-1 .0%
200bi>
3.0..
-13.2%
$119.0
$92.0
tA
$526.0
1111.1
$612.0
....
3.0..
IA
1.0..
-400bp
$92.0
-22.7%
ll2,Ml.8
7.0..
Source: Company data. Morgan Stanley Research
3.3%
..
IDIUliiCISlii~
,..
~-----
10,073.0
48.3%
120
........ .....
32.&%
1115
Operating Margin Bps Change
all values in $
10,073.0
48.3"
120
3 ,394.0
16.3%
15.1%
72
Growth
Low Quality Q4 EPS Beat
AOiUli
Jun.11E Jun:11E
$20,812.0 $20,960.0
10.0%
10.2%
5.0%
5.0%
-10,111.1.0,m
51 .N
S1 .7't.
1
1
20
10
Case
Where We Could be Wrong
Solld organic revenue growth: 04 organic revenue growth

of 5% was PG 's best result in six quarters, but would have
been 4% excluding 1% benefit from retailer load in ahead of
price increases. This is in-line sequentially with 03 trends, but
still a solid result given a difficult industry environment.
Organic growth was driven by +3% volumes, +3% pricing,
partially offset by -1 % mix.
Opitratlng lncom11
Operating Margin
30
Bear
Margin Expansion Potential: We

believe PG 's focus on cost-cutting
and productivity is increasing, which
should provide margin flexibility to
reinvest behind the business. We
forecast - 50 bps of annual margin
expansion in F2012-15.
Exhibit 2
Low quality Q4 EPS Is not a surprise In a difficult

environment: PG F4011 EPS of $0.84 was above our $0.81
estimate and the $0.82 consensus, but was aided by
non-operating items, including a lower than expected tax rate
(worth 2 cents to EPS), and higher than expected other
income (worth 3 cents) , while underlying operating profit
missed consensus by 4% (MS est. by 3%).
... .. -!11!11
--5 --- -
RESEARCH
Q4 Results Were Weak Quallty
.....
price target: 69
STANLEY
August 7, 2011
PrOC1er & Gamble Co.
August 7, 2011
Mixed cash flow and balance sheet results: PG reported

solid 04 cash flow results, with free cash flow up 17% y-o-y
driven by sequential improvement versus weak 03 balance
sheet results and change in other assets/liabilities. Working
capital results were still weak this quarter, with inventories up
Source: Morgan Stanley Research. FactSet
11-40
11-41
Morgan Stanley
16% and accounts receivables up 18% y-o-y, versus the 10%

increase in reported sales.
lnltlal FY12 Guidance Relatlvely In-Line But Weak
Q1 Guidance
PG guided to FY12 EPS of $4.17-4.33, in-line with the $4.26
consensus , up 6-10% (+8-12% excluding the higher 25% tax
rate) , on +3-6% organic revenue growth. Organic revenue
guidance includes +3-4% pricing, -1% to -2% mix, with the
rest of driven by volume. The relatively wide guidance range
is driven by the current level of economic uncertainty. PG
expects its organic revenue growth to be ahead of market
growth of - 3%, Including 4% growth in beau1y/groom ing, and
3% growth in household care. The company expects + 1-2%
growth in developed markets and +6-8% growth in emerging
markets. FX is expected to contribu1e another +2-3% to FY12
revenue growth.
MORGAN
STANLEY
MORGAN
STANLEY
August 7, 2011
We rate PG Overweight. Our price target of $69 is based on a

15 times multiple on our FY13 EPS estimate of $4.59, below
PG 's 16.5x five-year average historical NTM PIE of 16.5x.
Exhibit 4
Price/Cost Gap (Incl. Volume Impact) Should

Improve Significantly In Fiscal 2012
Key Risks to our Investment Thesis
PG's Price/Cost Gap (incl Vol ume Impact)
1500.0
so.so
S0.40
1000.0
0.0
$0.30
$0.20
$0.10
$0.00
-500.0
-so.10
-so.20
-1000.0
-$0.30
-$0.40
500.0
-so.so
-1500.0
1011
2011
RESEARCH
Valuation and Risks
significantly to +4 cents in FY12 vs. -40 cents in FY1 1 (we

assume 3% pricing in FY12 and commodity cost pressure
in-line with what was experienced in 2011).
Price
We expect PG 's pricing/commodity cost gap to ease

meaningfully In FY12: PG expects commodity cost inflation
in FY12 to be similar to FY11 levels, which implies a $1 .88
pretax headwind. PG expects to offset much of the dollar
headwind through pricing. bu1 still expects a net gross margin
impact which we estimate implies a 100-120 bps neaative
gross margin impact.
Morgan Stanley
RESEARCH
August 7, 2011
3011
Volume Commodities e Net Impact
We are raising our FY12e EPS to $4.20 from $4.16 solely on a

lower tax rate. with our 01 estimate of $1 .04 at the high end of
PG 's guidance.
As shown In Exhibit 4, after assuming a 67-bp volume impact

from each point of pricing , we estimate the net negative EPS
impact from commodity costs versus pricing will abate
Macro recovery stalls. Given Procter & Gamble's skew to

premium products, the company's organic sales growth
prospects will be significantly influenced by consumer
spending going forward. PG's volume is sensitive to macro
conditions as evidenced by its 2% volume decline in FY09.
We estimate that a 100-bp change in volume is worth 2% to
our FY1 2 EPS estimate.
Pricing environment does not Improve as much as we
expect. We expect improved HPC industry pricing going
forward with selective list price increases in certain categories
and less promotional spending. If the industry environment
was more competitive than we expect, we estimate that each
100 bps of pricing pressure would be worth 5% to FY12 EPS.
Strong balance sheet could drive or hurt shareholder
value. Procter & Gamble has a strong balance sheet with a
net debt/E81TDA of 1.5 times at the end of F2Q11 . The
company has sufficient flexibility to increase its share
buybacks above the $6-7 billion it did in FY1 1. In addition, PG
may elect to pursue acquisitions which could boost or detract
from shareholder value. If PG levers its balance sheet up to
2.0 times net debt/E81TDA by the end of FY12 to repurchase
shares, we estimate EPS would increase by 2%.
Cost-cutting. PG 's core SG&A as a percentage of sales
(excluding shipping and handling, ad spending, R&D expense,
and stock option expense) of 18% in FY1 O was the highest in
its large cap peer group despite PG 's leading scale. As such,
we believe PG has ample opportunity to pare back its SG&A
spending, and also generate COGS cost savings/productivity.
We also believe PG is more focused on cost cutting through
simplifying the organization and streamlining bu reaucracy, in
order to better capitalize on its scale. Each 50 basis points
change in core SG&A as a % of sales (about $400 million)
versus our forecast would be worth an estimated 2% to FY12
EPS.
Market share vacillates. There may be upside to PG 's FY12
EPS if market share gains accelerate with PG ramping up
investment behind the business and a strong innovation
pipeline. On the other hand, market share could stall with

higher pricing. We estimate each 100 basis points of
incremental volume would be worth 2% to FY12 EPS.
Currency movements. 62% of PG 's FY10 sales were
derived from outside the US. As such, fluctuation in
currencies could materially impact our EPS estimates. We
estimate that a 5% change in the USO versus PG 's basket of
currencies would have a 3% impact on EPS. PG is more
insulated from FX risk than its peers given relatively less
international exposure. In addition, PG 's significant
manufacturing footprint outside the US mitigates the potential
transaction impact of FX.
Commodity cost volatlllty. While PG 's diversified product
portfolio spreads out its raw material exposure across a wide
variety of inpu1 costs, volatile commodity costs could
significantly impact EPS. In past years, PG experienced
significant margin pressure from commodities with input costs
increasing $2 billion and $1 billion y-o-y in FY08 and FY09,
respectively. In FY11 , PG again experienced $1.88 in pretax
commodity cost inflation, which is in-line with PG 's forecast for
FY12 as well. We estimate that each 200 bps change in
overall commodity costs would impact EPS by 3%.
Morgan Stanley is currently acting as financial advisor to The

Procter & Gamble Company ("P&G'? with respect to P&G 's
announced merger of its Pringle 's business into Diamond
Foods, Inc. ("Diamond'? pursuant to a split-off.
The proposed offer is subject to the consummation of the
exchange offer to exchange shares of P&G for shares of
Diamond, required regulatory approvals and other customary
closing conditions. This report and the information provided
herein is also not intended to (i) provide advice with respect to
the exchange offer, (ii) serve as an endorsement of the
exchange offer, or (iii) result in the procurement, withholding
or re vocation of a tender in the exchange or any other action
by a security holder.
P&G has agreed to pay fees to Morgan Stanley for its services,
including transaction fees that are subject to the
consummation of the proposed\ transaction.
Please refer to the notes at the end of the report.
11-42
....
.s.w
Morgan Stanley
MORGAN
STANLEY
3::
0
c.
RESEAR C H
c:
Cb
August 7, 2011
,,
0
(ti
()
Ol
Exhibit 5
PG Income Statement
Decll E
11,828.8
6.9%
4.7%
Mar-12E
21 ,503.0
6.3%
4.7%
Jun12E
21,810.3
4.6%
4.6%
FY21112E
17,754.5
6.3%
4.3%
FY21113E
91,795.6
4.6%
% Growth
'lb Organic Growth
9.2'11
5.0%
2.0%
3.4%
Sep-10
20,122.0
1.6%
4.0%
4.0%
Sep-11 E
21 ,612.4
7.4%
3.0%
Cost of Sales
%ofSales
39,536.0
48.4%
39
38,690.0
37,919.0
48.0%
-241
9,689.0
48.2%
70
-10,287.0
48.2%
189
10,005.0
49.5%
135
-10,787.0
51.7%
110
-40,768.0
49.4%
134
10.730.9
49.7%
150
11,171.3
48.9%
75
10,634.6
49.5%
0
11,015.2
50.5%
-121
-0.553.0
49.6%
25
-45.099.6
49.1%
.50
31,0iM.O
41.Glt.0
52.0%
141
10,433.0
51.8%
-70
11,060.0
51.8%
189
10,225.0
50.5%
.135
10,073.0
48.3%
110
41,791.0
50.6%
-134
10,881.6
50.3'1!.
150
11,656.5
51.1%
.75
10,868.4
50.5%
0
10,795.0
49.5%
121
46,6116.Q
42,212.0
51.11%
.39
44.201.6
Gross Prof
50.4%
25
50.9%
50
25.661.0
-6,795.8
19.8%
4.6%
-66
-6,564.2
30.5%
1.7%
.137
-6.966.0
31.9%
1.6%
-27,914.9
3.11%
14
-6,579.5
30.4%
10.9%
96
FY200I
11.741.0
Income Statement
Sa~ s
Gross Margin %

SG&A Expense (ex lneremental ReslruCtUrlng)
%of S~es
%Growth
ma
FYl010
1f,IM.O
-ill%
1U3U
50.4%
496%
-25,575.0
31.3%
5.1%
.54
-22,240.Q
16,637.0
20.4%
7.7%
15
15,164.0
20.61(,
5.2%
20
Operating Income (eI Incremental Restructuring)

0!l"ating Margin
% Growth
OP"ating Margin Bps Change
29.0%
2.9%
Dec-10
11,347.0
1.5%
3.0%
Mar-11
20,230.0
5.5%
4.0%
Jun-11
20,860.0
10.2%
5.0%
FY21111
82.558.0
4.6%
4.6%
24.731.0
31.3%
11.2%
233
5,932.0
19.5%
-0.5%
-62
-6,495.0
30.4%
1.0%
14
-6,453.0
31 .9%
7.8%
69
-6,788.0
32.5%
5.8%
136
-60
-2UQ5.4
30.7%
4.11%
-43
1&JllJ)
4,501.0
22.4%
1.2%
.9
4,565.0
21 .4%
1.3%
-202
3,772.0
18.6%
-4.9%
-204
3,285.0
15.7%
11 .4%
16
16,1210
19.5%
1.0%
110
4,301.1
19.9%
-4.4%
246
4,860.7
11.3%
6.5%
.9
4,304.1
20.0%
14.1%
137
3,819.0
17.6%
16.6%
181
17.216.1
19.7%
7.3%
18
11,101.1
20.4%
8.1%
2838.0
18,961.0
23.0%
762.4
5,064.5
23.4%
758.2
5,618.9
24.6%
751.9
5.056.1
13.5%
772.1
4,601 .1
21.1%
3044.6
20,340.7
23.2'11
3141.7
21.842.9
23.8%
-837.8
38.8
20.6%
3.3%
31.llli
Memo Item: 8/TDA Margin
3082
18.846.0
24.6%
3100.0
19,396.0
24.6%
689.0
5.190.0
25.8%
711.0
5.276.0
24.7%
703.0
4.475.0
22.1%
1.467.0
462.0
-1,358.0
397.0
946.0
28.0
-2080
11.0
-209.0
10.0
-202.0
71 .0
-212.0
132.0
Bll .O
202.0
208.6
9.9
-209.5
9.4
-207.6
9.4
104.7
9.4
-830.4
Interest Expense
Oltlcl Non-Operating Income. Net
15.612.0
Taxes
TaK Rate
-4,309.0
27.61(,
14,IOlO
3.834.0
25.9%
15,314.0
3.931 .0
25.7%
4,282.0
1,201.0
28.0%
4,366.0
980.0
22.4%
3,641.0
-768.0
21.1%
3,205.0
-695.0
21.7%
15,414.0
-3.644.0
23.5%
4,103.4
1,025.8
25.0%
4,660.6
1,165.1
25.0%
4,106.1
1,016.5
25.0%
3,633.7
908.4
15.0%
lUOU
Prela Income
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
n.m.o
3,081 .0
3,386.0
2,873.0
i510.o
11,l50.ll
3,077.5
3,495.4
3,079.6
i125.3
1l,J77J
13,241.6
10,llU
11,383.0
SU1
12.2'11
$3.41
$3.61
$1 .13
3.0%
$0.84
$3.15
7.9%
18.2%
7.5%
$1.04
1.8%
$1.18
4.9%
$1 .05
9.5%
$0.93
10.9%
$4.20
5.6%
$1.02
4.6%
$0.96
1.9%
65%
$4.51
9.3%
3,078.4
3,316.8
2.952.0
3,154.1
2.896.2
3,100.2
2.828.5
3.025.6
1.800.3
3,000.2
2.801.2
1.999.3
1.786.5
1.983.6
2.804.4
3.001.9
1.773.0
2.970.1
2.756.0
2.953.1
1,739.6
1,936.7
1.724.4
2,911.5
2,748.1
2,945.3
2,687.4
2.884.51
Minority Interests
Net Income
EPS Diluted (Core)
EPS % Growth
Basic Shares
Diluted Shares
38.0
-4,125.9
25.0%
::::J
Ol
::::J
()
':
~
CD
CD
::::J
<t
66
3166
19.803.0
24.2'11
Memo Item: EBITOA (cxdud~g charges)
:!]
30.5%
4.0%
16
735.0
4,020.0
19.3%
Memo Item: D&A
::::J
(.Q
17,902.1
-4,654.5
26.0%
Source: Company data, Morgan Stanley Research estimates
Morgan Stanley
MORGAN
STANLEY
RESEARCH
August 7, 2011
Exhibit6
PG Balance Sheet
Bala1ce Sheet
'
IJec.llE
Mar-12 E
)Ln-12E ~
FY2012
FYl011E
0.0
2.768.0
0.0
1.500.0
0.0
1,500.0
0.0
1.500.0
0.0
1,500.0
0.0
2.500.0
2.500.0
6.175.0
7.379.0
1.335.0
4113.0
21 ,970.0
6.275.0
7,379.0
1,335.0
4213.0
21.918.0
6.705.4
8.101.4
1,383.1
4175.9
2U66.9
7,188.4
8.1065
1,461 .0
4079.6
13,335.5
6.830.2
8.141.0
1,376.1
4130.5
2im.9
6.648.1
7,557.1
1,395.9
3915.9
&.648.1
1,M7.2
1,395.9
zio21.o
3925.9
1UZ1
20,521.0
57,030.0
31,598.0
4.575.0
136,538.0
21.193.0
57.030.0
33,152.0
4.909.0
138,354.0
21.293.0
57.0lG.0
33.152.0
4.909.0
lll,354.0
21,196.1
51,030.0
33,152.0
4,909.0
139,154.1
11,340.3
57,030.0
33,151.0
4,909.0
139,766.7
11,556.8
57,030.0
33,152.0
4.909.0
139,625.7
22.081 2
57.030.0
33.151.0
4,909.0
139,199.2
57,lll0.0
:13.152.0
ll,909.0
13t,19t.2
0.0
0.0
11,158.0
6.267.0
9.816.0
27,241.0
0.0
0.0
9.721.0
6,458.0
9,996.0
26,175.0
0.0
0.0
9,981.0
8,012.0
9.290.0
27,193.0
00.0
0.0
9.!111.0
8.022.0
11.290.0
171.4
0.0
9.981.0
7,309.4
10,021.7
27,484.5
1.675.4
0.0
10,545.0
6,761 .6
10.406.0
29,388.1
980.5
0.0
10,545.0
6,179.3
10,410.0
28,714.8
789.7
0.0
10,545.0
8,059.6
9,626.0
29,020.2
11 ,317.0
10.1167.0
349.0
10,135.0
69,909.0
21.699.0
10.923.0
363.0
10,309.0
69,469.0
11.033.0
10.847.2
363.0
10.119.8
70,716.0
21.033.0
11 .156.4
363.0
10,172.2
71,109.1
10.058.0
11,347.4
363.0
9.915.3
71.081.8
10.058.0
11.351.3
363.0
10,097.6
70,585.8
10.058.0
11 ,079.6
363.0
9,771.1
70,192.0
FY2llll
FYl010
Sep-10
IJec.10
Mar-11
Jun-11
0.0
3.313.0
0.0
4.781.0
0.0
2.879.0
0.0
1,603.0
0.0
3,149.0
0.0
1.946.0
0.0
1,768.0
6.761.0
8.416.0
2.012.0
3.785.0
24,511J1
5.836.0
6.180.0
1.21111.0
3.199.0
21.1111.0
5.335.0
6.311.0
9llO.O
3194.0
11.712.0
6.002.0
7,277.0
968.0
3566.0
20,496.0
6.551 .0
7.413.0
963.0
3644.0
21 ,830.0
6.264.0
7,619.0
1,099.0
3886.0
21,814.0
PP&E, Net
GooclMll, Net
2ll.640.0
59.767.0
11.462.0
56.512.0
Olher Intangible Assets. Net

Otl1'f Asse<s
Total Assets
34.233.D
l2.6G6.Q
4.837.0
14URO
4.341.0
134.IJU
19.244.0
54.GlZ.O
31.tiJ&.O
4.498.0
121.172.0
19,877.0
56,171.0
31,369.0
4,n9.0
133.69i0
19,952.0
55.760.0
32,251.0
4,480.0
134,273.0
0.0
0.0
13.QIM.O
6,775.0
0.0
0.0
16.320.0
5.91).Q
00.0
0.0
8.472.0
7,251.0
11.Glll.O
e.an.o
8.559.0
-..i.o
JUIZ.8
0.0
0.0
11,511.0
6,716.0
9,411.0
27,640.0
20.852.0
10.lSW
0.0
21,360.0
10.ll02.0
324.0
11,464.0
10.709.0
346.0
10,678.0
70,837.0
Assets
S..pklsCash
Cash &Eqliva""'5
Investment Seru-iti!s
Receivables. Net
lnvcrto'ies
{)e(erred Income Taxes

Prepa~ Expenses and Olher Cu'rent Assets
Total Ci.nentAssets
I FYl011 i
Sep-11 E
FY2llll
o.o''
228.0
22.1181.2
6,954.f
7.81U
1,460.1
410f>i
J2,IOJ
22.534J
57,0lQ.O
31152.0
4.909.0
141,4713
Liabilities
Short-Tenn Debt
NOies and loon Payable
Curent Poltion of longTerm Debt
Accounts Payable
Acaued and Olher Liabiities
Total Cooenl lial>i1ities
.....
Long-Tem Debt
23.581.0
Deferred Income Ta11:es

Mioorilylnterests
11.IO!i.O
0.0
11.154.0
14AU
Olher~
Total lial>ilities
9.429.0
n.nu
10.119.0
17.ffl
27,llU
22.033.0
10,841.2
363.0
10.179.8
7V.TIIJI
781l7
0.0
10.545.0
8.058.8
9.&lB.O
a.mz
1.llB.2
o.o
12.6116.0
8.255.t
9,977.B
JZ,S17J
20.058.0
11.019.6
363.0
9,771.1
15,942.0
11.589.6
363.0
lt.2lz.t
11.m.z
9.764.6
Preferred Stock
3.746.0
1.325.Q
-47,l88..Q
9.AMJ
1,324.0
4.007.0
81.111.0
57.3111.0
1358.0
1.340.0
-55.961.0
11,19J
14UIZ.O
134.IJU
1.366.0
4.002.0
liD.301.0
Corm1oo Stoel<
AddCional Paid11 Capilal
Total lial>ilities&SE
c:
Cb
,,
0
Shareholder.;' Equity
RctaOledEa-rings
Acwlrulaled Olher Colr!>ehensM! Income (Loss)
Resaw for ESOP Debt Rru-ement
lre""'Y Slod<
T o t a l -' E<ty
3::
0
c.
48.11116.0
1,277.0
4.008.o
61.8117.0
64,614.0
1.241 .0
4.008.0
62.180.0
69,692.0
3,495.0
1.355.0
-65.101.0
67,069.0
1.141.0
4.008.0
61.180.0
71 ,582.7
2,831.0
1.355.0
-67.1116.7
62.BSs.o
1,253.0
4.008.0
61.985.0
68,111.0
5.356.0
1,355.0
-64,383.0
64,364.0
133,69i0
134,273.0
136,538.0
138,354.0
1.822.0
1.350.0
~1 .309.0
11.nu
121.172.0
(ti
1,260.0
4.0080
61 ,839.0
66,282.0
5,007.0
1J53.0
-64.174.0
67,638.0
1.241.0
4,008.Q
62.180.0
71582.7
2.832.0
1,355.0
~7. 186.7
1.241.0
4,008.0
62.180.0
73.101 .0
2,543.3
1,355.0
-68.686.7
131.354.0
139,154.1
I11J3U'
67,945.0
1.241 .0
4,008.0
62.180.0
75,046.1
2,148.4
1.355.0
70,1116.7
68,684.9
1,241.0
4.008.0
62.180.0
76,583.8
1,931.1
1.355.0
71 ,686.7
69,040.0
1,141.0
4.008.0
62.180.0
71,619.7
1.609.7
1,355.0
13.186.7
139,766.7
139,615.7
139,199.2
68.907.2
Source: Company data. Morgan Stanley Research estimates
7.2
1,241.0
4.000.0
62.180.0
84.087.9
379.0
1.355.0
79.486.7
111,291.2
139,19t.2
140,413.3
1.241.0
4,008.0
82.180.0
71,629.7
1.609.1
1.355.0
11186.7
I. .
()
Ol
3
(.Q
:!]
::::J
Ol
::::J
()
~
(f)
f!]:
CD
CD
::::J
iii
7
,,..s.
....
....
.s.UI
Morgan Stanley
MORGAN
STANLEY
s::0
RESEARCH
Q.
c:
Augu1t 7, 2011
ii)"
"Tl
0
ro
()
Pl
Exhibit 7
PG Cash Flow Statement
I FY2011
Dec11 E
Mar12 E
Jun-1 2E
FY20IZE
FY2013E '
FY20lll
FY20IO ' sei):10
Dec10
Mar-11
Joo-11
11,323.0
10,98.0
11.383.0
3,081 .0
3.386.0
2.873.0
2,510.0
11,850.0
3077.5
3495.4
3079.6
1725.3
12,377.I
13.247.6
3.166.0
555.0
1J14.0
1.219.0
3.111!2.0
516.0
3,108.0
453.0
36.0
1,121.0
689.0
87.0
48.0
2.0
711.0
93.0
94.0
115.0
703.0
115.0
44.0
797.0
735.0
119.0
-58.0
680.0
2838.0
414.0
128.G
-240.0
762.4
88.7
48.2
346.2
758.2
94.9
771.1
121 .4
19.7
-M.O
3044.1
3141.7
422.3
430.7
.eo.a
287.3
751 .9
117.3
84.8
-46.0
519.5
-64.3
329.3
432.0
1.G50.0
134.0
1.239.0
1U14JI
415.0
-497.0
175.0
74.0
536.0
2,877.0
06.0
38.0
154.0
566.0
4,056.0
69.0
316.0
581.0
1.106.0
3,846.0
-426.0
.501.0
358.Q
1190.0
13,231.0
-430.4
-713.4
20.1
-07.6
3.Q85.4
483.0
4.1
164.4
246.8
3,659.7
358.2
34.5
11.6
171.2
4,505.1
182.1
583.8
496.2
-326.5
4,466.8
.308.0
ll,072.0
-43M
-604.0
-303.0
114.0
2.452.0
.3n1
.758.0
14,111.G
14.0
66.0
2446.0
305.0
3715
-408.7
11.m.o
548.1
-8.5
17.811.1
Cash Flows from Investing Activities:

Copltal Expenditures
Proceeds kom Asset Sa~s
Payment for Acquisitions
Other
Gash Used for Investing Activities
3.048.0
928.0
-381.0
50.0
3.238.0
1,C117.0
368.0
166.0
737.0
8.0
37.0
153.0
-813.0
810.0
67.0
54.0
-31.0
-828.0
1.240.0
136.0
15.0
24.0
1113.0
665.5
0.0
0.0
0.0
-665.5
902.3
0.0
0.0
0.0
902.3
968.5
0.0
0.0
0.0
968.5
1,296.5
o.o
0.0
0.0
3.832.8
0.0
0.0
0.0
3.595.3
0.0
0.0
0.0
.z.m.o
S19.0
14.0
-398.0
25.0
928.0
3.306.0
225.0
-474.0
73.0
.Z.541.0
1087.0
3Cle8.0
-425.0
ln.O
...,.0
129 ~5
.3,132.1
-uw
Cash FloWs kom Fmnclng Activltcs:

Change In ShOO-Tcrm Oebt
Change In Loog-Term Oebt
Oivldends Pa~
Pu<chase of Treasury Shares
Proc- From Stock Oplions. Olller
Cash Used for Financing Activities
1.844.0
-4.659.0
-4.856.0
-10.047.0
1a1.o
-2.420.0
2.339.0
-5.044.0
-6.370.0
181.0
.111,114.11
-1.79&0
-4,716.0
-5.458.0
-8,004.0
721.0
-17,216.0
2.412.0
-17.0
1.422.0
3.010.0
138.0
-1.901.0
1.464.0
1.393.0
-1.412.0
-518.0
374.0
1,627.0
1368.0
28.0
-1 403.0
-1.008.0
248.0
-3,559.0
571 .0
-18.0
1530.0
2.503.0
544.0
-2,936.0
m .o
1.330.0
5.767.0
-7.039.0
1301.0
2068.0
1975.0
1550.4
1500.0
200.0
2,757.4
-894.9
0.0
1541B
1500.0
200.0
l.536.7
190.8
0.0
1679.5
1500.0
200.0
-3.170.3
1.353.7
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-8.330.9
-6.000.0
-10,0Z10
171.4
0.0
-1559.3
-1500.0
200.0
2.687.9
o.o
-284.0
1468.0
3,313.0
4,111.0
o.o
-122.0
-1902.0
4.781.0
o.o
101 .0
276.0
2,879.0
2,003.0
0.0
9.0
646.0
2.603.0
3,249.0
0.0
28.0
-303.0
3.149.0
2,946.0
0.0
25.0
178.0
2.946.0
2,768.0
0.0
163.0
111.0
2.879.0
2,7118.o
o.o
0.0
-268.0
1.768.0
1,500.0
0.0
0.0
o.o
2.500.0
2,500.0
0.0
0.0
0.0
2,500.0
2,500.0
o.o
o.o
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2,500.0
2,500.0
Cash Flow
Net Income
Adjustments:
Depreciation and Amortiza~n
Stock-Based Compensation Expense
Deferred Income Taxes
ou..,r
ChangeslnM
Rccelvab~s
Inventories
NP. Acaued and Odl!< lla~lilles
00...r Operating Assets and Ua~~ties
Cash Provided by Openitioos
Cash Provided by lliscootlnued Ope<ations

Exchange Rate Effect on CaSh I Olhe<
Net Increase (Decrease) In Cash and Cash Equivs
Cash and Cash Equlvs. Beg
Cash and Cash Equlvs. End
FY20lll
ll.llOJI
0.0
344.0
-2041.0
S,354.0
Ul3.0
511.G
120.0
m.o
142.0
2,171.0
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118.2
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-8.300.0
800.0
-12.112.2
-lJ,456.I
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2.768.0
o.o
0.0
0.0
2.500.0
2,500.0
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11-47
Morgan Stanley
M OR G AN
S TA NLEY
Morgan Stanley
R ESEA R CH
MORGA N
August 7, 2011
MORGAN STA NLE Y
rnIDJ ModelWare
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basis. ModelWare also emphasizes the separation of operating performance of a compan y
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Important US
Regulato ~
~~t\~i:,~: ~~t . 12 months, Morgan
S TANL E Y
RESEARC H
August 7, 2011
Disclosures on Subject Companies
tanley managed or co-managea a public offering (or 144A offering ) of securities of Colgate-Palmolive Co, Procter
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Avon Products Inc., Clorox Co,
Colgate-Palmolive Co Newell Rubbermaid Inc., Procter & Gamble Co., Weight Watchers International.
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Global Stock Ratings Distribution
Coverage Universe
% of
Investment Banking Clients (IBC)

% of % of Rating
Count Total IBC Category
Stock Rating Category
Count
Overweight/Buy
1107
40%
451
48%
41 %
Equal-w eight/Hold
1136
41%
372
40%
33%
Total
Not-Rated/Hold
114
4%
20
2%
18%
Underweight/Sell
384
14%
97
10%
25%
Total
2,741
940
Data include common stock .and AD~s cur~ently a~signed ratings. An in.vestor's decision to buy or sell a stock should depend on individual
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.
Analyst Stock Rati ngs
Overwekighdt .(0). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe
'
on a TIS -a Justed basis, over the next 12-18 months.
Equal-weight (E).kThde. stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a TIS -a iusted basis, over the next 12-18 months.
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Stock Price, Price Target and Rating History (See Rating Definitions)
(as of July 31 , 2011)
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10
11
11-48
11-49
Morgan Stanley
M ORGAN
S TAN LEY
Morgan Stanley
R E S EA R C H
August 7, 2011
Procter
90
+-NAr l c - - - - - -
assumptions that may not be realized . If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's
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-NA/ I- -
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80 _:_--::_
70
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R E S EARC H
The value of and income from your investments may vary because of chan~es in interest rates , foreign exchanle rates, default rates, prepayment rates,
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1
1 20 ~~~~~~~~~~~~~~~~~~__:=--~~~~~~~~~~~--,~~~~~~~~~~~~~~~--,
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Gamble Co. <PG.N) - As of 8/7/11 in USO

: Household ~ Personal Care
~
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August 7, 201 1
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arising from,
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S:tock RG1tit"lg Histor'=': 8/1/08 : O/ l; 10/8/ 08

7 / 15/ 10 : f / l; 2/7/ 11 : 0 / 1
Price TQrget Histor'=': 4/30/08 : 83; 10/8/ 08
2/7/ 11 : 7&; 4/28/ 11 : 72
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NA; 10/20/ 08 : 82; 10/22/ 08 : 80; 11/ 12/ 08 : 79; 1/ 1&/ 09 : NA;
Source : Mo rgQn St.G1nle~ Rcts:eQrch

Date F'ormQt : MM/ 00/
S:tock Price CNot Couered b '=I Current Anal>Jst> S:t.ock Pricct
Stock and lndust.r'=' RG1t.ings ( G1bbreuiG1t.ions: below > Qppear QS
S:tock Ratings : Ouerweight <O> EctuQl-we:ight <E> Ut"lderwe: i ght
lndustr'=I View: Attractive <A>
In-lif'le (I>
Cautious <C>
:~~'1:~~~~b~~ty"J~r"rt~f ~~~~- a\:f~~a~es\~~i~~ni~efr:\~~~tl:;n:f~a~~i~~~o~i~~~ra~~s~1i.'i~~lg~~:; ~n~;c~~~~rv\'~~e~~h~~?~~~~l:s Ynih~L8k
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VV
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13
11-50
11 -51
11-52
Identify at least two applications that use forecasted financial statements.
Morgan Stanley
MORGAN
STANLEY
RESEARCH
Forecasts of the income statement typically require estimates of cost of goods sold (gross profit) and
operating and nonoperating expenses (revenues) as a percentage of revenues . Identify at least three
financial statement adj ustments that we discuss in previous modules that might affect our forecasts for
gross profit margin and operating expense percentages.
Forecasts of ~he balance sheet commonly require estimates of the relative percentage of balance sheet
accounts to revenues. Identify at least three financial statement adjustments to reported balance sheet
items that can impact that item 's relation to revenues. These can include adjustments to recognize assets
and/or liabilities that are not recognized under GAAP.
The Americas
1
t"'
I j
Europe
[~
NT
'
'
'
l1
~
fl
Japan
' to,
d 1 II
l\,irf
J(
'
I ~ ( (
f \ i i\I
What does the concept of financial statement articu lation mean in the forecasting process?
A s1a/Pac1f1c
~ t
C..U
1t1 I
1 fo <I
,,r ("
Untted States
United Kingdom
Japan
i.1 1111,l)1J1 j(J()(J
1.,1.1 1 1()1,'U11/1fl!JO(J
111 +t~llUI ~JL1
1 ,,
K\
f,
'
' '.':>'
'
Hong Kong
ouu
Net operating assets typically move proportionately with revenues. How do the "buffer zone" and
"financing" sections of the balance sheet offset some of these changes in net operating assets?
1.1 ~fb?~84es;::ou
Identify and describe the four major steps in forecasting financial statements.
In addition to recent revenues trends , what other types and sources of information can we use to help
us forecast revenues?
Industry Coverage:Household & Personal Care
Company (Ticker)
Rating (as of) Price (08/05/2011)
Dara Mohsenlan, CFA

Avon Products Inc. (AVP.N)
Church & Dwight Co . Inc. (CHD.N)
Clorox Co (CLX.N)
Colgate-Palmolive Co (CL.N)
Energizer Holdings Inc (ENR.N)
Newell Rubbermaid Inc. (NW L.N)
Procter & Gamble Co. (PG.N)
Tupperware Brands Corp. (TU P.N)
Weight Watchers International
(WTW.N)
E (10/04/2010)
E (08/19/2009)
E (07/15/2011)
E (07/15/2010)
E (02/0212011)
0 (12/1512010)
0 (02/07/2011)
0 (08119/2009)
E (02/1 Bf2011)
$23.21
$38.54
$67.18
$84.15
$78.02
$13.16
Describe the rationale for use of year-end balances in the computation of turnover rates (and other
percentages) that are used to forecast selected ba lance sheet accounts.
What are "comparable store sales" for retailers and why are they important?
Capital expend itures are usually an important cash outflow for a company, and they figure promjnently
into forecasts of net operating assets. What are the sources of information about capital expenditures
that we can draw upon?
$60.59
$56.47
$61 .7
Stock Ratings are subject to change. Please see latest research for each oompany.
1-tistorical prices are not split adjusted.
Assignments with the ~ logo in the margin are available in an online homework system.
See the Preface of the book for details.
Forecasting an Income Statement (L02)
Abercrombie & Fitch reports the fo llowing income statements .

Income Statement, For Flscal Years Ended ($ thousands)
Jan. 29, 2011
AHElll:llllMBIE &
Jan.30,2010
Jan.31,2009
FITCH
(ANF)
Net sales .............. .. . .... . ....... ... .. ... ..... .

Cost of goods sold . . ... . ..... . . .. .. .... . .... ... . . ...
201 1
Morgan S tanley
$3,468,777
1,256,596
$2,928,626
1,045,028
$3,484,058
1,152,963
Gross profit. . . . . ... . . ... . . .... . . . .. . .. . .. . . . . . .....

Stores and distribution expense ... . ...... . . ... . . ..... .. .
Marketing , general and administrative expense ...... . .... . .
Other operating income, net ..................... .. .. . .
2,212 ,181
1,589,501
400,804
(10,056)
1,883,598
1,425,950
353,269
(13,533)
2,331 ,095
1,436,363
405 ,248
(8,778)
Operating income ...... . . . .. . ..... ......... .. .......

Interest expense (income), net . ... .. . . . . .... . .. . . ... .. . .
231,932
3,362
117,91 2
(1,598)
498,262
(11 ,382)
Income from continuing operations before taxes . . . . . . . .. .. .

Tax expense from continuing operations . . ... .. . . . .. . .. . . .
228,570
78,287
119,510
40,557
509,644
201 ,475
Net income from continuing operations .................. .
150,283
78,953
308,1 69
(78 ,699)
Loss from discontinued operations, net of tax .. ........ . . . .

Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 150,283
254
(35,91 4)
$ 272,255
Forecast Abercrombie & Fitch 's fiscal 2012 income statement assuming the fo llowing income statement
relations. AlJ percentages , other than sales growth and provision for income taxes, are based on percent
of net sales .
11-53
Net Sales growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10%
Cost of Goods Sold/Net sales . ..................... . ........ . . . . . ....... .

Stores And Distribution Expense/ Net sales .... . ............................ .
Marketing, General And Administrative Expense/ Net sales .... . .... . .... ... . ... .
Other Operating Income, Net .. ... .. .. . . .... . .... . .. .... .... ......... .. .. .
Interest Expense (Income), Net .. .. .. .. . ....... ....... ... .... ... . ........ .
Tax Expense From Continuing Operations (% Of Pretax Income) ......... ... ... . .
Net Loss From Discontinued Operations (Net Of Taxes) ..... .. ................ .
36%
46%
12%
10,056
3,362
34%
0
May30, 2010
May31,2009
sales ............. . .. .... .. ................ ... .

st of sales . .... .. . ....... . .................. . . .
!ling, general and administrative expenses . . ........ .
Divestitures (gain), net . . ... . ...... . . ... . .. . . . . . . .. .
Restructuring, impairment, and other exit costs ....... . .
$14,880.2
8,926.7
3,192 .0
(17.4)
4.4
$14,635 .6
8,835.4
3,162.7
31.4
$14,555.8
9,380.9
2,893.2
(84.9)
41.6
rating profit . ............................. .. ... .

nterest, net .... ..... . .. .......... ...... .... .... . .
2,774.5
346.3
2,606.1
401.6
2,325.0
382 .8
2,428.2
721 .1
96.4
2,204.5
771.2
101 .7
1,942.2
720.4
91.9
earnings, including earnings attributable

to noncontrolling interests .. . ... . ... .. ... . .... .. . . . .
earnings attributable to noncontrolling interests ... . ... .
1,803.5
5.2
1,535.0
4.5
1,313.7
9.3
earnings attributable to General Mills ... . .. . . . . ... .. .
$ 1,798.3
$ 1,530.5
$ 1,304.4
ings before incomQr taxes and after~tax

earnings from joint ventures . .. .. . ... ..... . . . ... .... .
me taxes ..................... . ....... .... . . . . .
Mll-12. Forecasting an Income Statement (L02)
BEST BUY
May29, 2011
Best Buy reports the fo llow ing income statements.
(BBY)
February 26,
February 27,
2011
2010
Revenue .. . .. .. ....... . .. . ........ . .. ..... . .. ...... . ....... .

Cost of goods sold .. . .. . .... . . ...... .. .. .. . ............. ... . . .
Restructuring charges-cost of goods sold .. ........ ... ......... .. .
$50,272
37,611
24
$49,694
37,534
$45,015
34,017
Gross profit . ... ... . ... . ... ................ . ...... ... .... .... .
Selling , general and administrative expenses .. ... .......... . ...... .
Restructuring charges ................. .. .................... . .
Goodwill and tradename impairment ........ ... . . .... . ..... .... .. .
12,637
10,325
198
12, 160
9,873
52
10,998
8,984
78
66
Operating income ........ . ................................... .

Other income (expense)
Investment income and other .. ... ... . . . ..... . . .............. . .
Investment impairment ... .. . . . ..... . . . . . ... .. . . . ..... . . .. . .. .
Interest expense .. . ...................................... . . .
2,114
2,235
1,870
51
54
(87)
(94)
35
(111)
(94)
Earnings before income tax expense and equity in income of affiliates .. .

Income tax expense . .. . .. ...... .. .......... .. .. .. .... . ....... .
Equity in income of affiliates ... ........ ... .... . ................. .
2,078
714
2
2,195
802
1,700
674
7
Net earnings including noncontrolling interests ... . . . .. . . . ..... . .... .

Net earnings attributable to noncontrolling interests .. ... . .... .. .. . .. .
1,366
(89)
1,394
(77)
1,033
(30)
Net earnings attributable to Best Buy Co., Inc ... .... . ... .... .. ..... .
$ 1,277
$ 1,317
$ 1,003
Income Statement, Fiscal Years Ended ($ millions)
Forecast Best Buy's fi scal 2012 income statement assumjng the following income statement relations.
All percentages (other th an revenue growth, income tax expense, and net earnings attributable to noncontrolling interests) are based on percent of revenue .
Revenue growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5%
Cost of goods sold/Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Restructuring charges - cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses/Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and tradename impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense(% of pretax income). ............ . ..... .. . ... ... . .... ... . . . . .
Equity in income of affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to noncontrolling interests
(%of Net earnings including noncontrolling interests) ...... ...... ........... ... . . ..
75%
$0
21 %
$0
$0
$51
$0
$(87)
34%
$2
Mll-13. Forecasting an Income Statement (L02)
CENEHAL MILLS
(GIS)
General Mills reports the fo llowing fiscal year income statements.
7%
11-54
Forecast General Mill s' fiscal year 2012 income statement assuming the following income statement
relations . All percentages (other than net sales growth , income taxes, and net earnings attributable to
noncontrolling interests) are based on percent of sales.
Net sales growth .. .. .... ... . . ......... . ............ ...... . .................. .
5%
Cost of sales/Net sales .............. .. .. . .... ...... ... . .... . .. . . ..... .. ..... .
Selling, general , and administrative expenses/Net sales ........... ... . . . . ... . .. . .... .
Divestiture (gain), net . ... ....... ... . ...... . ................ .. ... ... .......... .
Restructuring , impairment, and other exit costs ...... . ........... . .. . . . ..... .. . ... .
Interest, net . .. . . . . . . . ... .. .. ... . ... .. .. .. . ..... ... ... .... . . . .. .. ....... . .. .
Income taxes (% pretax income) ............ .. . ........ ... . . ...... . . . . . .. ... . .. .
After-tax earnings from joint ventures .. ..... . . . . .. ........ . ....... .............. .
Net earnings attributable to noncontrolling interests(% net earnings before attribution) .. . . .
60.0%
21 .5%
$0.0
$0.0
$346.3
29.7%
$96.4
0.3%
Analyzing, Forecasting, and Interpreting Working Capital Using Turnover Rates {L03)
Harley-Davidson reports 20 JO net operating working capital of $ 1,833 million and 20 JO long-term
operating assets of $2,679 mjllion.
a.
b.
HARLEY-DAVIOSllN
(HOG)
Forecast Harley-Davidson's 20 l l net operating working capital and 20 11 long-term operating

assets . Assume forecasted 2011 net revenue of $4,938 million, net operating working capital
turnover of 2 .65 times , and long-term operating asset turnover of l .81 times . (Both turnover rates
are computed here usi ng year-end balances. Finance receivables and related debt are considered
operating under the assumption that they are an integral part of Harley 's operating acti vi ties.)
Most of Harley's receivables arise from its financing acti vities relatin g to purchases of motorcycles
by consumers and dealers . What effect will these receivables have on Harley 's operating working
capital turnover rate ?
Analyzing, Forecasting, and Interpreting Working Capital Using Turnover Rates {L03)
Nike reports 20 l 0 net operating worhng capital of $2,595 million and 20 I 0 long-term operating assets
of $3 ,460 million .
a.
b.
NIKE
( NKE )
Forecast Nike's 2011 net operating working capital assuming forecasted sales of $ 19 ,451 million ,
net operating working capital turnover of 7.33 times, and long-term operating asset turnover of 5 .50
times . (Both turnover rates are computed here using year-end balances .)
Nike 's long-term operating asset turnover rate is comparatively high. Can you suggest a possible
reason given Nike's busi ness model? Explain.
Mll-16. Forecasting the Balance Sheet Using Turnover Rates
(L02, 3}
Refer to the General Mills information in M 11-13 . Assume the forecast of 20 12 net sales is $ 15 ,624.2
million. Use the following financial statement rel ations to forecast General Mills ' receivables , inventories, and accounts payable as of the end of May 2012 .
GENERAL MILLS
(GIS)
11-55
Year-end turnover rates
2012
Year-end receivables/Net Sales . .. . . ... . . ... . . . .

Year-end inventories/ Net Sales ......... . . . . . .. .
Year-end accounts payable/Net Sales ...... . .... .
Liabilities and stockholders' equity

Current liabilities
Accounts payable .. . . ... . . ... ... . .. ... .... . .... .... . . .. . . . . .
Accrued expenses .. . . ... . ... .. . ... .... . ... ... .. .. .. .. . . ... .
Deferred lease credits .. . . . .. .. ... . . .. . . .. . .. . ... . . . . . . . . . . . .
Income taxes payable ..... . . . ... . . . ... . . . . .. ... . . .... ... .. . .
7.8%
10.8%
6.7%
Mll-17. Adjusting the Income Statement (L02)
KllAFT FllllUS, INI:.
Kraft Foods, Inc., reports the followin g foo tnote to its 20 I 0 IO-K .
(KFT)
Pizza Divestiture On March 1 , 2010, we completed the sale of the assets of our North American
frozen pizza business ("Frozen Pizza") to Nestle USA, Inc. (" Nestle") for $3.7 billion. Our Frozen Pizza
business was a component of our U.S. Convenient Meals and Canada & North America Foodservice
segments. The sale included the DiGiorno , Tombstone and Jack's brands in the U.S., the Delissio
brand in Canada and the California Pizza Kitchen trademark license. It also included two Wisconsin
manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery
trucks. Approximately 3,600 of our employees transferred with the business to Nestle. Accordingly,
the results of our Frozen Pizza business have been reflected as discontinued operations on the consolidated statement of earnings, and prior period results have been revised in a consistent manner.
What adjustment(s) might we consider befor e w e forecast Kraft 's income for 2011 ? H o w would w e treat
the cash proceeds that Kraft realized on such a sale?
Ell-18. Analyzing, Forecasting, and Interpreting Income Statement and Balance Sheet (L02, 3)
Fo llowing are the income statements and balance sheets of Abercrombie & Fitch .
Income Statement, For Flacal Years Ended ($ thousand8)

Net sales .. .. . . ... .... . ... . . . ..... ..... ... . . . ...... .
Cost of goods sold .... . ...... . . .... . . . . . . ..... . .. . .. .
January 29, 2011
January 30, 2010
$3,468,777
1,256,596
$2,928,626
1,045,028
$3,484,058
1,152,963
2,212,181
1,589,501
400,804
(10,056)
1,883,598
1,425,950
353,269
(13,533)
2,331,095
1,436,363
405,248
(8,778)
Operating income ...... . . . ..... . ... . . ... . . . . . . . .... .

Interest expense (income), net . . . ....... . .. . .. .. .. .. ... .
231,932
3,362
117,912
(1 ,598)
498,262
(11,382)
Income from continuing operations before taxes . . . . . ..... . .

Tax expense from continuing operations . . . . ..... . ... . . . . .
228,570
78,287
119,510
40,557
509,644
201 ,475
Net income from continuing operations ...... . .. . . . . . . ... .
150,283
78,953
308,169
Loss from discontinued operations, net of tax . .. ......... . .

Net Income ....... . . .. . . ... . . . . .. .... . . . . . ... . .. . .
$ 150,283
(78,699)
(35,914)
254
$ 272 ,255
Consoldall8d Balance ......

(Thomands. except par value amounts)
January 29, 2011
Current Assets
Cash and equivalents . .. . . . ..... . ....... . .. . .. . .. .. ..... . ... .
Marketable securities .. . . .. .. . . .. . ......... .. .... . .. . ... . ... .
Receivables .. . ........ . .. .... .. . .. . . ..... . . . .. . .... . .... . .
Inventories ..... . . . . . ........ . .. ... . ... . ..... . . ... ....... . .
Deferred income taxes . . ... . ... ... ... . . ... .. ... . .... . ... .... .
Other current assets ... . .. .. ..... . . . .. . .. ........... .. .. ....
Janmry 30,
81,264
385,857
60,405
79,389
$ 669,950
32,356
90,865
310,645
44,570
77,297
.
.
.
.
1,433,268
1,149,583
100,534
264,517
1,225,683
1,244,019
141 ,794
210,370
Total assets .. . . .. ... .. . . .. . .. . . . . .. .. . ... ......... . ....... .
$2,947,902
$2,821 ,866
Total current assets . ..... . ..... ... . . . . ... . .. ..... . . .. ... ...
Property and equipment, net ......... . .. ........ . .. . . . .. . ... .
Noncurrent marketable securities ... ... . ... .. .... . .... .. ......
Other assets .......... . ... . . . . . . . ... . . . .. .. . . . .. . .. . ......
$ 826,353
$ 150,134
246,289
43,597
9,352
558,851
449,372
.
.
.
.
33,515
192,619
68,566
203,567
47,142
212,052
71,213
214,170
Total long-term liabilities . . .... .... .. . . ..... . ..... . .. ... .. .. .. .

Stockholders' equity:
Class A common stock-$0.01 par value: 150,000 shares
authorized and 103,300 shares issued at each of January 29,
2011 and January 30, 2010 ... .. ... . . .. .. ... ........ ... . . .. .
Paid-in capital . . . . . . . . ..... .. . . .... . . ... . .... . .. ... ... ... . .
Retained earnings . .... . .... .. .... . . . ..... . . .. ... . . . .. . ... .
Accumulated other comprehensive loss, net of tax .. ...... . ....... .
Treasury stock, at average cost 16,054 and 15,314
shares at January 29, 2011 , and January 30, 2010, respectively . .. . .
498,267
544,577
1,033
349,258
2,272,317
(6,516)
1,033
339,453
2,183,690
.(8,973)
Total current liabilities ... . . ... . .. . . ....... .. ... ... . .. . . .. .. ..

Long-term liabilities
Deferred income taxes . . . ..... .. . . ... .... . . . . . ... .... ..... ..
Deferred lease cl-edits . .. . . .... .......... . .. .. .... .... . , . . ...
Long-term debt .. . . . .. . ....... . .... ... . . . . . .... .... .... ...
Other liabilities . ... ..... . . ... . . . . ... . . .. ... . . . . ... . . ... .. . .
(725,308)
(687,286)
Total stockholders' equity ...... ... ..... . . . . . .... . . . .... .. ... .
1,890,784
1,827,917
Total liabilities and stockholders' equity .... ... . . ..... . .. . .... . . . .
$2,947,902
$2,821,866
a.
Forecast Abercrombie & Fitch 's fi scal 20 J2 income statement and balan ce sheet using the follo wing rel ati ons (assume ' no change' for accounts no t listed). A ssume all capital expenditures are
purchases of property and equipment.
January31,
. . ..... .. . .
. .. . ...... .
. .. . ...... .
. . . . ...... .
Gross profit . ... . ... . ..... . . . .... .. ..... ..

Stores and distribution expense .. . ... . .......
Marketing, general and administrative expense ..
Other operating income, net ......... . . . . . . .
$ 137,235
306,587
41,538
73,491
continued
Net sales growth . . .. .... ... . .. .. .... . .. . .. .. . ... . .. . .... . . .. . .. . ...... . . . .
10%
Cost of goods sold/Net sales .. ... . ... . ....... . . . ..... . .. . . . .. ... ... .... ... . .
Stores and distribution expense/Net sales ... . .. . .... .. .. . . . . ... .. . ... . . . ... .. .
Marketing, general and administrative expense/Net sales ... ...... .. .... ....... .. .
Other operating income, net .. .. .. . ... ... . . . .... ..... ... . . .. .. . .. . .. .... . .. .
Interest expense (income), net .. .... ... . . . . .. .. .. . . .... .. . . . . . . .. .... ..... . . .
Tax expense from continuing operations(% of pretax income) . . . . ... .. . . . ... .. . . . . .
Net loss from discontinued operations (net of taxes) .... . . . . .. .. .. .... . . . .. . . ....
36.20%
45.80%
11 .60%
$10,056
$3,362
34.30%
$0
Cash and equivalents/Net sales .. . ... .. .... . .. .. .... . .... .. ... .. ....... . .... .
Receivables/Net sales . . ...... ..... . . . . .... ... . . .... . .... ..... . .. . .. .... . .
Inventories/Net sales . .. ...... . . .. . . . ... ... . . ..... . .. . .. . . .. .... . ..... . . . . .
Deferred income taxes/Net sales . . .. ... . .. . . ..... ... ... . .. ... ... . ...... . . . ..
Other current assets/Net sales .. . .. ... ... . ... .... . . . . . . . ... ... .. ... . . ... .... .
Other assets/Net sales .... . ... .. ..... . . . . . . .. ... . . .. .. . . . ... .. . . ... .. .... .
Accounts payable/Net sales . . . . ... . . . . . ... .. .. . .. . . . .. ... .... . . . .. . . . . ... .. .
Accrued expenses/Net sales ... . . . .. .. . . .. . ... . . ... . .... . ..... .. ...... ... .. .
Deferred lease credits/Net sales . .... ... . . . .. . . . .. .... .... . .... ... . . ... .....
Income taxes payable (% tax expense) ... ... . . .. ... .... . . .. . ... .. . . . . . . . . .. .. .
Deferred income taxes/Net sales .... .. . . . ...... .. .. . . .. .... . ... .. .. . .. . ..... .
Deferred lease credits/Net sales . . . ... .. . . . ... .. . . . .. . . .... ... .. . ... .... . .. . .
23.8%
2.3%
11.1%
1.7%
2.3%
7.6%
4.0%
8.8%
1.2%
93.9%
1.0%
5.6%
Capital expenditures (% Of Sales) . .. .. ... ...... . .. ... . . .. . . . ... .. . . ... .. . ... .

Depreciation & amortization .. . .. .. . . . . ..... . . . . ... .. . . ... . . . . . . ...... . ..... .
Dividends (% Net income) . .......... ...... ... ...... . . ... . .... ... . . .. . . . . ..
Current maturities of long-term debt ... ... . . . .. ... . . . . . ... .... . . . .. ...... .. . . .
4.6%
$229,153
41.0%
$0
b.
What does the forecasted adjustment to bal ance the accounting equation fro m part a reveal to us
about the forecasted financing needs of th e company? Ex pl ain .
11-56
11-57
ABERCllllMlllE &
FITl:H
(ANF)
~
BEST BUY r:o., INI:.
Ell-19. Forecasting the Statement of Cash Flows (L04)

Refer to the Abercrombie & Fitch fi nancial informati on in Exercise 11 - 18. Prepare a forecast of fi
20 12 statement of cash flows.
SCal
Ell-20. Analyzing, Forecasting, and Interpreting Both Income Statement and Balance Sheet (Lo 2 ,
31
Following are the income statements and balance sheets of Best Buy Co., Inc.
(BBY)
Liabilities and equity

Accounts payable ..... . ..... .. ..................... .. . . ...... .
Unredeemed gift card liabilities . . .... .. ...... . ........ .. .. . ...... .
Accrued compensation and related expenses .... . .. . .. . . . . . . .. .. .. . .
Accrued liabilities . .. . .. . . .... . . ..... ... ... . ... . .. . ..... . .. . .. . .
Accrued income taxes .. . ..... . ..... . .... . ........... . . . .. . . ... .
Short-term debt ............................................. . .
Current portion of long-term debt . . ... . ....... ........ . ... .... . ..
$ 4,894
474
570
1,471
256
557
441
$ 5,276
463
544
1,681
316
663
35
Total current liabilities .......... . . .. . . ..... . . .. ....... . .. .. . ..

Long-term liabilities . . .. . . . ........... .. ............. . .. . .. . . . . .
Long-term debt . . ...... . ..... . ... .... . .... ........ .......... . .
Equity
Best Buy Co., Inc. shareholders' equity
Preferred stock, $1 .00 par value: Authorized-400,000
shares; Issued and outstanding-none .... ..... .. . .. . .... .. . . .
Common stock, $0.10 par value: Authorized-1 .0 billion
shares; Issued and outstanding-392,590 ,000
and 418,815,000 shares, respectively ........ . .. .. .. . .... . . . .
Add itional paid-in capital .......................... . ........ .
Retained earnings . .. . . .. . .... . .. . .. . . ... .... ... .. . ..... . .. .
Accumulated other comprehensive income ..... .. .... . ... .. .... .
8,663
1,183
711
8,978
1,256
1,104
39
18
6,372
173
42
441
5,797
40
6,602
690
6,320
644
February
February
Income Statement, Fiscal Years Ended ($ mllllons)
28, 2011
27,2010
Revenue . ..... . ..... . .......... . ..... .. ........ . .. .. .... .. . .

Cost of goods sold .. .... .... . . . ..... . . . ......................
Restructuring charges-cost of goods sold . .... . ..... . .... . . . ..... .
$50,272
37,611
24
$49,694
37,534
Gross profit. . ...... . .. . ............ .. ....... . ........... . ... .

Selling, general and administrative expenses ..... . .... . . . .. . . . ... . .
Restructuring charges .......... . ...... . .. . .. . .. . . . . .. . ... . . . . .
Goodwill and tradename impairment .... . ....... ..... ... ..... . . .. .
12,637
10,325
198
12,160
9,873
52
Operating income ......... . ......... . .. . ........ .. . .. .. . . ... .

Other income (expense)
Investment income and other .. . ........ . ............. ... .. . .
Investment impairment . . ........... .. . ...................... .
Interest expense .. ...... .... .... . . . . . .......... . ........... .
2,114
2,235
51
54
(87)
(94)
Earnings before income tax expense and equity in income of affiliates . . .

Income tax expense .............. . .. . . .. ... ... ............... .
Equity in income of affiliates .... . . . ... . . .. . .. . .. . .. . . ....... .. .. .
2,078
714
2
2,195
802
1
1,700
674
7
Total Best Buy Co., Inc. shareholders' equity . . . . . .. . .... . . . . . . . . .

Noncontrolling interests ..... . .. . . ... ... .. . . ..... . . . .. ....... .
Net earnings including noncontrolling interests . ..... . .. . . .. ........

Net earnings attributable to noncontrolling interests ......... .. ......
1,366
(89)
1,394
(77)
1,033
(30)
Total liabilities and shareholders' equity .. . ... ... .. . . . ......... .... . .
Net earnings attributable to Best Buy Co., Inc ............. . . . . .. . .. .
$ 1,277
$ 1,317
$45,015
34,017
10,998
8,984
78
66
1,870
35
(111)
February
February
28, 2011
27,2010
Assets
Cash and cash equivalents ..... . .. . . . ............... .. ..... . .. .
Short-term investments . . . .. . .. . . . .. . . .. . . .. .. ... . .. . ........ .
Receivables . ........ . . . . ...... . ... . .. . . .. .. ... . ... ..... ... .
Merchandise inventories ... . ... . ................. .. .. . ... . .... .
Other current assets . . .. . .. . .... . ..... . ..... . . .. . . .. . .. . .. . ..
$ 1,103
22
2,348
5,897
1,103
$ 1,826
90
2,020
5,486
1,144
---
10,473
10,566
766
2,318
4,701
120
757
2,154
4,447
95
Less accumulated depreciation .... ... . ..... . .. . .... . . ... .. ... . .
7,905
4,082
7,453
3,383
Net property and equipment. .. . . . ..... .. ..... .. ..... . .. . . ... . . .

Goodwill .. . ......... . .. . ..... . .... .. . . ......... . .. . . . . .. .. .. .
Tradenames, net. .... . . . . . ... . .. . ............. ... . . . . . .. . . . . . . .
Customer relationships, net . ... . . . .. . . ... . . ............... . ..... .
Equity and other investments .. ... .... . .. ... ........ ....... ... .. .
Other assets .. .. .. .. .. . ... . . .. .... ... .. .. ...... . . . . . ......... .
3,823
2,454
133
203
328
435
4,070
2,452
159
279
324
452
Total assets . . . .. .... .. ..... . .. .. . . . . .... . ... . . .... ......... . .
--$17,849
7,292
6,964
$17,849
$18,302
---
$ 1,003
- --
Balance Sheet ($ mHllons, except per share and share amounts)
Total current assets ........ . ....... . . . ..... . . . . .. . . ........ .

Property and equipment. . ................ . .. ...... . . .. .. .. ..... .
Land and buildings .. . . ............. . ...... .. . ............... .
Leasehold improvements .... . ...... .. .. . ... .. ............. . . . .
Fixtures and equipment ... . . . ....... .. . .... . .. ... ...........
Property under capital lease . . ... . . . . . . . .. .. . . . ................ .
Total equity .. . . . ... . . .. . .. .. . .......... . ... . . .......... .. . . .
- -$18,302
continued
a.
Forecast Best Bu y 's fi scal 201 2 income statement and balance sheet using the followin g relati ons
(assume ' no c hange' for accounts not listed) . A ssume th at all capital ex penditures are purchases of
property and equ ipment .
Revenue growth ... . . . . ... ... .. . .. . .... .. .... .. . .. . ................... . ..
5%
Cost of goods sold/ Revenue .......... .. ........ . .. . ...... . . .. ..... . .. . . .

Restructuring charges - cost of goods sold .. .. .......... . . . . . . . .. . ...... . ..
Selling, general and administrative expenses/Revenue ....... . ..... . . ...... ...... .
Restructuring charges . .. .. .. . . ... ... . ...... . .. . ........... . .. .. ........ . . .
Goodwill and tradename impairment .. . .. ... . .. . ........ .. . . .... . . . ..... . .. .
Investment income and other ..... .. ....... . .. ...... .... . ... . .. .... ....... . .
Investment impairment ... . ........ .. ... .. ... . . .. .. .. ...................... .
Interest expense . . .. . .. . . . .................... . .. . .... ... . ......... . . . ...
Income tax expense/Pretax income) . .... ... .. . ..... .. ............... . ....... .
Equity in income of affiliates..................... . .. .. ......... . ... . . ....... .
Net earnings attributable to noncontrolling interests/ Net earnings including
noncontrolling interests ......... . ..... . ... ... ..... . .. ........... . .. .... . .
74.8%
$0
20.5%
$0
$0
$51
$0
$(87)
34.4%
$2
Cash and cash equivalents/Revenue ...... . ..... .. . ..... . . . ..... . . . . ... . ..... .
Receivables/Revenue .. .. .. . ... . ............ .......................... .. .
Merchandise inventories/Revenue . ...... ..... ................ .. . . ..........
Other current assets/ Revenue ................................... . .......... .
CAPEX (Increase in gross Property and equipment)/Revenue . .. . . ... .. . .. . . . .. . .. . .
Goodwill . . ..... . ........... .. .. . .. .. .. . ....... . ........ ... . .. . ......... .
Tradenames, Net amortization ............................................. . .
Customer relationsh ips, Net amortization ..... . . .... . . . .......................
Equity and other investments . . .............. . ..... . ....... . . . .. . . . ......... .
Other assets/Revenue ........... . . . . ...... . .... . .. .. .... .. .. . ......... . . . .
2.2%
4.7%
11 .7%
2.2%
1.5%
no chg
$25
$38
no chg
0.9%
6.5%
continued
11-58
11-59

Accounts payable/ Revenue .... . ................. . ......... .. ... . ... . ... . ..
Unredeemed gift card liabilities/Revenue . ..... .. . .............. . ... . ....... . ..
Accrued compensation and related expenses/ Revenue ... . . .. .. .... ... . . ..... . . . .
Accrued liabilities/ Revenue ........ ... . .... .. .. . . ... .. . .......... ... . ...... .
Accrued income taxes/Revenue . . ..... . .. . ..... . ...... . ...... ..... . ..... . .. .
Long-term liabilities . . ... .... .... . ......... . . .. . . .... . . .. ........ .. . ..... . .
Noncontrolling interests ...... . ....... . .. . .. . . . .. .. .... ... . ... . .......... . . .
Capital expenditures/Revenue ... .. . ....... .... . ... ... .. . ..... ... ......... .. .
Depreciation/Prior year gross PPE . . .. .... . . .. . ....... ............ .. . ... . .. .. .
Amortization/ Prior year intangible asset balance ......... . . ....... . .... . ... . . ... .
Dividends/ Net income ............... ... . ......... . ............ ..... . . ... . .
Long-term debt payments required in fiscal 2013 . . ..... .. .. . . .... . .. . . ..... .. .. .
9.7%
0.9%
1.1%
2.9%
0.5%
no chg
Accounts payable ... ........... . .. . . . ... . .. . ........ . ..... .

Current portion of long-term debt .. . . ... . . .. . . . ..... . . . .. . .. . .
Notes payable . .. ....... . . .... . ... .... . ..... .. . . . ... . ... . .
Other current liabilities . .. .. . . ..... ... . . .. ..... .. . . .... ..... .
1.5%
12.0%
18.7%
18.6%
$37
Increase by net income attributable to noncontrolling interests and assume no dividends
b.
~
BEST BUY 1:11., INI:.
(BBY)
~
GENERAL MILLS,
INI:.
(GIS)
What does the forecasted adjustment to balance the accounting equation from part a reveal to
about the forecasted financing needs of the company ? Explain.
us
Ell-21. Forecasting the Statement of Cash Flows
11-60
(L04)
Refer to the Best Buy Co., Inc., financial information from Exercise 11-20. Prepare a forecast of its
fi scal year 2012 statement of cash flows . (Hint: Use net income before noncontrolling interests to begin
the statement of cash flows.)
Ell-22. Analyzing, Forecasting, and Interpreting Income Statement and Balance Sheet
(L02, 3)
Following are the income statements and balance sheets of General Mills, Inc.
Income Statement, Flscal Years Ended

(In mHllons except per share data)
May29, 2011
May30,2010 May31,
Net sales ...... . .. .... ... ..... . ........... .. . . . . . . ...... ... .. .

Cost of sales .. ..... .................... ... .... .... . . ...... . .
Selling, general and administrative expenses . ......... .. . .... . ... .
Divestitures (gain), net .... . ............ .. . .. ... . .. ........... .
Restructuring, impairment, and other exit costs . ... .. ... ... .. .... . .
$14,880.2
8,926.7
3,192.0
(17.4)
4.4
$14,635.6
8,835.4
3,162.7
31.4
$14,555.8
9,380.9
2,893.2
(84.9)
41.6
Operating profit . ..... .. . . . ... .. .. . ................ .. .... . .. .. .

Interest, net . . . ........ ... ...... . ... ... . ... . ... ... .......... .
2,774.5
346.3
2,606.1
401.6
2,325.0
382.8
Earnings before income taxes and after-tax earnings from joint ventures . . .
Income taxes ...... . .......... . ....... . ..... . ... . ...... . .. . .. .
After-tax earnings from joint ventures .... . ...... ... ... . .. ... ... . .. .
2,428.2
721 .1
96.4
2,204.5
771 .2
101 .7
1,942.2
720.4
91.9
Net earnings, including earnings attributable to noncontrolling interests .. .

Net earnings attributable to noncontrolling interests .... .. .. ....... ... .
1,803.5
5.2
1,535 .0
4.5
1,313.7
9.3
Net earnings attributable to General Mills .. . ...... . ... . . . .. .. .. .... .
$ 1,798.3
$ 1,530.5
$ 1,304.4
Balance Sheet (In millions)
a.
May 29, 2011 May 30, 2010

$
619.6
1,162.3
1,609.3
27.3
483.5
673.2
1,041.6
1,344.0
42.7
378.5
Total current assets .. .. . . . . ....... .... .. .... . .. . . . . ... ... .

Land, buildings and equipment ..... ...... . . .. . ...... . .... .. . .
Goodwill ...... . ...... ......... . ............ . . ... .... .... .
Other intangible assets .... . . ............. . .. . .. .. .. .. ...... .
Other assets ... . . . .. ..... ..... .... .. .... . .. ...... . .......
3,902 .0
3,345.9
6,750.8
3,813.3
862.5
3,480.0
3,127.7
6,592.8
3,715.0
763.4
Total assets ....... . ....... . . ....... . . . .. .... ... .... ....
$18,674.5
$17,678.9
continued
995.1
1,031.3
311.3
1,321.5
849.5
107.3
1,050.1
1,762.2
Total current liabilities ... . .... . .. ...... . .... ... .. .........

Long-term debt . . .. ....... ... . . . ... . . . ........... .... . ..
Deferred income taxes ............. ... ....... . . .. .... ......
Other liabil!ties ... . . .. , , .. , ........ . ......... .... ... .....
.
.
.
.
3,659.2
5,542 .5
1, 127.4
1,733.2
3,769.1
5,268.5
874.6
2,118.7
Total liabilities ...... ... ...... .. .... .... ... . .. . . . . . .. . ...

Stockholders' equity
Common stock, 754.6 shares issued, $0.10 par value ...........
Additional paid-in capital ......... .... ...... ... . .. .... ...
Retained earnings ... . ...... ............ ... .... ..........
Common stock in treasury, at cost, shares of 109.8 and 98.1 .....
Accumulated other comprehensive loss .. . . ...... .. . . . .. ....
12,062.3
12,030.9
.
.
.
.
.
75.5
1,319.8
9, 191.3
(3,210.3)
(1,010.8)
75.5
1,307.1
8,122.4
(2,615.2)
(1,486.9)
Total stockholders' equity . . . ... .. . . . .. ............. . .... .. .

Noncontrolling interests .. . .. .... .... . ...... ... .. .. .. ....... .
6,365.5
246.7
5,402.9
245.1
Total equity ..... ... . .......... . .. .. .. . ... .... ...... . .. . .
6,612.2
5,648.0
Total liabilities and equity ... . .. ....... .. . .. .. .. ... .... . .. .. . .
$18,674.5
$17,678.9
Forecast General Mills ' fiscal 2012 income statement and balance sheet using the following rel ations (assume ' no change' for accounts not li sted) . Assume all capital expenditures are purchases
of land , buildings and equipment , net, and that depreciation and amortization expense is included
as part of selling , general and administrative expense($ millions).
Net sales growth . . . . . ....... . ...... ... . .... . . . .. .. ...... .. .. .... . . .....
5%
Cost of sales/ Net sales .... . . ........ . ... . ... . ......... . ..... . ... .... . ..
Selling, general , and administrative expenses/Net sales ........ .. ..... . ........ .
Divestiture (gain), net . . .. . . ... .. . . . ..... ........ ..... ...... . . . . .. . . ..... .
Restructuring, impairment, and other exit costs .......... ....... ..... ...... .. .
Interest, net ... ... .... .... ....... . . .. . ... . .... .. ..... ........... . . .... .
Income taxes/ Pretax income ... .......... . . ..... ... . . .. . ..... .. .......... .
After-tax earnings from joint ventures ...... . ..... .. . . .... . . . .... . . . .. .. .... .
Net earnings attributable to noncontrolling interests/Net earnings before attribution . . .
60.0%
21 .5%
$0.0
$0.0
$346.3
29.7%
$96.4
0.3%
4.2%
Cash/ Net sales ...... .... .... ........... .. . . .. ... . ........... . ..... ....
7.8%
Receivables/Net sales . .. .. . ....... . . . . ...... . . .. ...... ..... . .. . . . ...... .
10.8%
Inventories/ Net sales . .. ..... . ... . .. .. . .... ..... .... . ....... . .... .. ..... .
0.2%
Deferred income taxes/Net sales .... .. . ... . ... .. . . . .. .... . .. . ...... . . . .. . .
Prepaid expenses and other current assets/Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2 %
Other intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 amortization
Other assets/Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.8%
6.7%
Accounts payable/ Net sales .. .. ........ .... . . . . .. ........ .. . . . . ..... .. ... .
8.9%
Other current liabilities/Net sales .. .. ....... . . .... .. . ... ... . . ... ....... . . .. .
$733.6
Current portion of long-term debt . . . .... ... ...... . .. .. ........ . . . ..... . ... .
7.6%
Deferred income taxes/ Net sales ... . ... . .. . . . .. ...... . ......... .. .... ... .
11 .6%
Other liabilities/ Net sales . . ..... . ..... . . . .... .... .. .. ..... . .. .. . . ....... . .
Assets
Cash and cash equivalents .. .... ... ... ... . ... . .. ... ... .... . .
Receivables . .. ... .... .. ......................... . .. . .... .
Inventories ..... . . ... ....... ........ .. . .... .. . . . . . .. . .... .
Deferred income taxes . . ... . ....... . ..... .... . ... . ......... .
Prepaid expenses and other current assets .............. ... .. . .
Noncontrolling interests . .... .. . .. .. . . . . ..... .... ......... ........ ...... . .

Capital expenditures/Net sales . ..... ... . ...... . .. ... . .. ... . . . .. . . .. .....
Depreciation/Prior year net PPE ........ . . .... .... .... ... ... . ...... . ... . . .. .
Dividends/Net income .. ........ ....... .... . . ..... ....... . ...... . . . . . . .. .
Current maturities of long-term debt in fiscal 2013 . ....... . . . .. ..... .. ..... . .. .
4.4%
20.7%
40.6%
$733.6
Increase by net income attributable to noncontrolling interests and assume no dividends.
b.
What does the forecasted adjustment to balance the accounting equation from part a reveal to us
about the forecasted financing needs of the company? Explain .
Ell-23. Forecasting the Statement of Cash Flows
(L04)
Refer to the General Mills, Inc. , financial information from Exercise 11-22. Forecast General Mills'
fiscal 2012 statement of cash fl ows . (Use net income before noncontrolling interests to begi n the statement of cash fl ows.)
GENERAL MILLS,
INI:.
(GIS)
11-61
Ell-24. Adjusting the Balance Sheet for Operating Leases
DELTA AIR LINES

(DAL)
a.
b.
What balance sheet adjustment(s) might we consider relating to the leases before we force
fi nancial statements? (Hint: Consider the distinction between operating and nonoperating ass:
and liabilities.)
What income statement adjustment(s) mi ght we co nsider? (Hint: R eflect on the operating and
nonoperati ng distinction for lease-related expenses.)
Ell-25. Adjusting the Balance Sheet for Equity Method Investments
ABBOTT
LABURA TORIES,
INI:.
(ABT)
TAP
PHARMAl:EUTU:AL
PRllOUl:TS INC.
~
WHOLE FllllUS
MARKET, INC.
(L01, 2, 3)
Delta Air Lines reports total net operating assets of $ 12, 130 million , nonoperating li abilities of$ I l ,2
33
million, and equity of $897 in its 20 I 0 10-K. Footnotes reveal the existence of operating leases that ha
a present va lue of $7,088 million (see Module IO for computations).
ve
(L03)
Abbott Laboratories, Inc. , reports its 50% joint venture investment in TAP Pharmaceutical Products
Inc. using the equity method of accounting in its 2007 I 0-K. The Abbott balance sheet reports an investment balance of $ 159 million. TAP has total assets of $ 1,354.2 million, liabilities of $ 1,036.7 million
and equity of $3 17.5 million. Abbott 's investment balance is , thus , equal to its 50% interest in TA P'~
equity ($3 17.5 million X 50% = $ 158.75 million , rounded to $ 159 million). What adjustment(s) might
we consider to Abbott 's balance sheet before we forecast its financial statements? (Hint: Consider the
distinction between operating and nonoperating assets and liabilities.) What risks might Abbott Laboratories face that are not revealed on the face of its balance sheet?
Ell-26. Analyzing, Forecasting, and Interpreting Income Statement and Balance Sheet
(L02, 3)
Following are the income statement and balan ce sheet of Whole Foods Market, Inc.
2010
2009
Sales ....... .. ....... . . . ... . . . . . ............ . . .

Cost of goods sold and occupancy costs . ..... . . .... .
$9,005,794
5,870,393
$8,031,620
5,277,310
$7,953,912
5,247,207
Gross profit ... . .. ........... . ... ........ .. . . . . . .

Direct store expenses .. .. . ............ .. . .. . .... . .
General and administrative expenses ...... . ........ .
Pre-opening expenses .. ... .... ..... . . .. ......... .
Relocation, store closures and lease termination costs .. .
3,135,401
2,375,716
272,449
38,044
11 ,217
2,754,310
2,145,809
243,749
49,218
31 ,185
2,706,705
2,107,940
270,428
55,554
36,545
Income Statement, For Years Ended (in $ OOOs)
Operating income .. . .......... .............. . ... .

Interest expense ..... . .......................... .
Investment and other income ... ... ... . .... .. . .. ... .
437,975
(33,048)
6,854
284,349
(36,856)
3,449
236,238
(36,416)
6,697
Income before income taxes ....... ... ........ .. .. .

Provision for income taxes . .................. . .... .
411 ,781
165,948
250,942
104,138
206,519
91,995
Net income . .... .... . ... . .... ... ............... .
$ 245,833
$ 146,804
$ 11 4,524
2010
2009
Assets
Cash and cash equivalents . . ............................ ... .... . ..... .
Short-term investments-available-for-sale securities ............ .. .. . .... . .
Restricted cash . . ... .. .... ......... . .. ..... ............ . ........... .
Accounts receivable ... .... ... .............. . .. . .. . ....... ... ....... . .
Merchandise inventories . . ........... . ......... .. ... . ..... . ..... . .. . . .
Prepaid expenses and other current assets ... ... .................... . . . .. .
Deferred income taxes . .. ... . . . ........ . ... .. ........... .. ... . .. . .... .
$ 131,996
329,738
86,802
133,346
323,487
54,686
101,464
$ 430,130
Total current assets . ... ....... .. ... . . .. ... ... ........ . ..... .... . . . .. .
Property and equipment, net of accumulated depreciation and amortization .. .. . .
Long-term investments-available-for-sale securities ... ... . . . .......... . . . . .
Goodwill ........ . ... . ... . ..... ... .. .. . . ... .. ... .. .. .. ....... . . . . . . .
Intangible assets, net of accumulated amortization .. ... ................. ... .
Deferred income taxes .... . ....... . ...................... .. .. . .. ..... .
Other assets ... -:--. . . ........... .. .. . ... . .. . . . ... .... ..... . ...... .. . . .
1,161,519
1,886,130
96,146
665,224
69,064
99,156
9,301
1,055,380
1,897,853
Total assets ....... . . . .. ................. . ............... . ... . . . . .. . .
$3,986,540
$3,783,388
410
213,212
244,427
289,823
Total current liabilities ....... . .. .. .. ........... . ... . .. . . . .... ...... .. . .

Long-term debt and capital lease obligations, less current installments ........ . .
Deferred lease liabilities . .. .. .... . ...... .. . ... ...... ... .. ... .... . ..... .
Other long-term liabilities .... ... .. . . ...... . . . . . . . . ......... .. ... .. . . .. .
747,872
508,288
294,291
62,831
684,024
738,848
250,326
69,262
Total liabilities ... ... ....... . ................ ..... . .. . ..... ........ . . .

Series A redeemable preferred stock, $0.01 par value, 425 shares authorized;
zero and 425 shares issued and outstanding at 2010 and 2009, respectively . . ...
Shareholders' equity:
Common stock, no par value, 300,000 shares authorized; 172,033 and
140,542 shares issued and outstanding at 201 O and 2009, respectively . .... . . .
Accumulated other comprehensive income (loss) ..... ..... . . . .. ....... .... .
Retained earnings . .. .. ... .... . .. ......... . ..... . .... . .......... .... .
1,613,282
1,742,460
413,052
1,773,897
791
598,570
1,283,028
(13,367)
358,215
Total shareholders' equity .. ...... ...... .. ............ ............ .... .
2,373,258
1,627,876
Total liabilities and shareholders' equity .. . ..... ...... .... . ............. . . .
$3,986,540
$3,783,388
Forecast Whole Foods Market's 2011 income statement and balance sheet using the following relations ($ 000)-assume ' no change' for accounts not listed .
Sales growth ........... . .. . .......... . .......... . ... . . ..... ...... . .. .. .
Cost of goods sold and occupancy costs/ Sales ...... . ... . ... . . . .... ..... .. . . .
Direct store expenses/ Sales ... . ... ... . . ..... ..... .. .. . .... . .. . . ... ... .. . . .
General and administrative expenses/Sales . ............ ... . ...... ... . . .. . . . .
Pre-opening expenses/Sales .... .. .......... . .... ................ ........ .
Relocation, store closure and lease termination costs . .. ...................... .
Interest expense . . .. ............ . ...... .. .. . .......... . .. ..... ....... . . .
Investment and other income .... .. ........... . ..... . . .. ... ... . .. ......... .
Provision for income taxes/ Pretax income ........ .. ........ . . ... . .. ....... . . .
10.0%
65.2%
26.4%
3.0%
0.4%
$0
$(33,048)
$6,854
40.3%
Cash and cash equivalents/Sales . ...... . ............ .. .... .... ... . ....... .
1.5%
Restricted cash .. . . . . .. . . . . ... . . . .... . . . . . .. . .. . ........ . .... . .... . ... .
$86,802
Accounts receivable/ Sales ............ . ... . ...... ... . . .. . . ...... . .. .. .... .
1.5%
Merchandise inventories/Sales . . ... .... .. . .. .......... .. ... . . .. ...... .... .
3.6%
Prepaid expenses and other current assets/ Sales ....... . ... .... .. . .. .... .. ... .
0.6%
Deferred income taxes (current) ...... . .... . . .... . . . .. ............... .. .... .
$101,464
Long-term investments-available-for-sale securities . . .... ...... ... . .. ... .. ... .
$96,146
Goodwill . ... . .... ........ . ......... .. ....... . ..... ..... ... . ... ..... .. .
$665,224
Intangible assets, net of accumulated amortization . . . . ........... . . . ..... . .. . . .
$69,064
Deferred income taxes (noncurrent) ................. ...... . . .. . ...... . . .. .. .
$99,156
Other assets/ Sales ....... . ... .. . .. .. . . . .. . . . .. . . ........ .. .. .. . . ....... .
0.1%
Current installments of long-term debt and capital lease obligations . . . ... . ...... . .
$410
Accounts payable/Sales ... . .... .. ..... . .... . .. .... . . ... . ... .. . . ........ . .
2.4%
Accrued payroll, bonus and other benefits due team members/Sales . . ... .... . ... .
2.7%
Other current liabilities/Sales ... . ... . ......... .. . .. ... . .. ... ..... . ........ .
3.2 %
Current maturities of long-term debt and capital lease obligations ...... .......... .
$410
Deferred lease liabilities ..... ...... . ... . .. . . . . .. .. ...... . ... ... .. ..... . .. .
$294,291
Other long-term liabilities/Sales ... . . . . .. .... .. . ........ ......... . . . . . .. ... .
0.7%
Series A redeemable preferred stock ... . .. . . . ...... .. .. ... ........ . .. .. .. . . .
$0
Common stock . . . . ... . . ...... ............ .. .. . . . . . . . . .. .... . ....... ... . $1 ,773,897
Accumulated other comprehensive income (loss) ... .. .. . .... . ... .. .. ....... . . .
$791
Capital expenditures/ Prior year net PPE ............... . . .... ............. . . .
13.5%
Depreciation & amortization/ Prior year net PPE ............. . . . . . . .. ....... . .. .
14.5%
Dividends/ Net income . ......... . .. ... . .. ..... .. .... ....... . . ........... .
3.5%
71,023
104,731
310,602
51 ,137
87,757
658,254
73,035
91 ,000
7,866
b.
continued
389
189,597
207,983
8,217
277,838
a.
(WFM)
Assets (in $ OOOs)
Liabilities and Shareholders' Equity

Current installments of long-term debt and capital lease obligations ....... . . .. .
Accounts payable .. . ......... .. . . . . . ... . . ......... ... . .... .. ... . ... . .
Accrued payroll, bonus and other benefits due team members . . ... ... ... .. .. .
Dividends payable . . . . ... . .. . . ....... ... . .... ..... . .... . ... .. .. ..... .
Other current liabilities .. . . .. . . . .. .... ... .. .. .. ... .......... .... . . . ... .
W hat does the forecasted adj ustment to bal ance the accounting equation from part a reveal to us
about the forecasted financing needs of the company?
11-62
11 -63
WHOLE FllUllS
MAllKET, IN!:.
(WFM)
INTEL
( INTC)
Ell -27. Forecasting the Statement of Cash Flows (L04)

Refer to the Whole Foods Market, Inc. , financial information from Exercise 11-26 . Prepare a fore
of its fiscal year 20 11 statement of cash flows .
cast
Ell-28. Projecting NOPAT and NOA Using Parsimonious Forecasting Method (L06)
Following are Intel's sales, net operating profit after tax (NOPAT) , and net operating assets (NOA) t
its year ended December 31 , 20 IO ($ mill ions).
or
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,623
Net operating profit after tax (NOPAl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 ,250
Net operating assets (NOA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,652
Forecast Intel's sales, NOPAT and NOA for years 201 1 through 2014 using the fo llowing assumptions:
Sales growth per year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10%
Net operating profit margin (NOPM). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25%
Net operating asset turnover (NOAl), based on NOA at December 31 , 2010 . . .
1.5

Operating expenses
Sales and marketing . . . .. . .... .. . . . . . ... .. . . . . . . . . . . . .. . . .... . .
Software license updates and product support . .. . .. .. . .. .. . . . . . . . . .
Hardware systems products . . . .. . .. . .. .. . . . . . . . . . .. . ... .... .. . .
Hardware systems support . .. . ... . . . . . ... . . . . .... .... . ... .... .
Services . . . . . ... . .. . . .. . . . . ... ... ..... . .. . . .. .. . . . . .. . . . . .. .
Research and development ... .. . ... .. ... .. . . . . . ... . .. . . . . . .... .
General and administrative ... . .. .. . . . .. . . . . ... .. . . .. .. .... .... . .
Amortization of intangible assets . ... . . .. .. . . . . . . . .. . ..... . .. . . .. .
Acquisition related and other .. . .. . . ... . . . .... . .. . . . .. .. . . ... ...
Restructuring . .. .. . .. . . . . .. . . .... . . . . .. . ... .. .. . . .... . . . . .. . .
6,579
1,264
2,057
1,259
3,818
4,519
970
2,428
208
487
5,080
1,063
880
423
3,398
3,254
911
1,973
154
622
3,706
2,767
785
1,713
117
117
Total operating expenses . .. . . . .. . . . . . .. . . ... . ... . .. . .. . . . .. . .. .
23,589
17,758
14,931
Operating income . . . . . .. . .... . . . ..... .. . : .. . . .. . . ... .. .. . . . . .

Interest expense . . .. . . ..... . . . . ... . . . . . .... ... .. . .. .. . . . . ... . .
Non-operating income (expense), net ... . . .. . ... . . .... . . . . . ... . . . .
12,033
(808)
186
9,062
(754)
(65)
8,321
(630)
143
Income before provision for income taxes . . .. . . .. .. . ... . .. .... .... .

Provision for income taxes . .. . . .. ... . . . ... .. . . . . .. .. . . . . .... . . . .
11,411
2,864
8,243
2,108
7,834
2,241
Net income . . . .. . .. .... .... ... ... .. . . ... . . . .. . . .. . ....... . . . . $ 8,547
:JM CO.
Ell-29. Projecting NOPAT and NOA Using Parsimonious Forecasting Method (L06)
Following are 3M 's sales , net operating profit after tax (NOPAT), and net operating assets (NOA) for
its fi scal year ended 2010 ($ mill ions).
(MMM)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,662
Net operating assets (NOA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,305
Forecast 3M's sales , NOPAT and NOA for fiscal years 2011 through 2014 using the following
assumptions:
Sales growth per year . . . . . . . . . ....... . .. . .. . . . .. .. . . .. . . . ... . .. . .. .
15%
Net operating profit margin (NOPM). .... .. . . . .. .. . . . .. . .. . . . . . . . . . . .. .
16%
Net operating asset turnover (NOAl), based on NOA at 2010 fiscal year-end ..
1.6
Assets
Cash and cash equivalents . . . . . ... .. . . . . .. . . . . .. . . .. .. . . . . . ... .. . . . . . .
Marketable securities . ... . . .. . . . .. . .. . .. .. . . .. ... . . . .. .. ... ... . . . .. . . .
Trade receivables , net of allowances for doubtful accounts of $372 and $305
as of May 31 , 201 1 and 2010, respectively . . . . .... .. . . . . . .. ... . . . . .. ... . . .
Inventories .. . ... . . . . .. . . . . .. . .. .... ..... . . . . . .. .... .... .... .. . . .. . .
Deferred tax assets .. . . . . . . . . .. .... . .. . . ... .. . . . . . .. . . ...... . .. . . . . .
Prepaid expenses and other current assets .... ... . . . . . . . . . . . . . . . ... . . .... .
Total current assets . . . .. ... . .. ... .. . . ..... .. . . . . ... . .. ..... ... .. .. .. .
Non-current assets
Property, plant and equipment, net . . . . . . . . ...... . . .. .. .. . .. . . . .. . ... . . .
Intangible assets, net . . . . . . .. .. . . . . . ... . . . . .. . . ... . . . . . . . . . .. . . . .. .. . .
Goodwill ... . .. . . . . . . . . . . . .. . .. . .. . .. . .. .. . . .... ...... . . . . . . .. . . . .. .
Deferred tax assets ... . . .. . .. . .. . .. . . .. . . ... . . . . .. . . . . . . . .. . . .... ...
Other assets . ... ... .. . . . . . .. . . . . . . . . .. . . . . . . . . . . . .... ..... .... . . ... .
Total non-current assets . . . . . .. ...... . .. . . . . . . . .. ... .. .. . . . .. . . .... .. .
Pll -30.
llllAl:LE
COllPOllA TlllN
Forecasting the Income Statement, Balance Sheet, and Statement of Cash Flows
Following are fiscal year fi nancial statements of Oracle Corporation .
(ORCL)
Veer ended -
31 Gn mllllona)
2011
Revenues
New software licenses . .. . . .. . .. . ... . .. . . . .. . .. . .. . . . .. . . . ... . . $ 9,235
14,796
Software license updates and product support . . .. .. . ... . . .. . . . . . .. .
$16,163
12 ,685
$9,91 4
8,555
6,628
303
1,189
2,206
5,585
259
1,159
1,532
39, 174
27,004
2,857
7,860
21 ,553
1,076
1,015
2,763
9,321
20,425
1,267
798
34,361
34,574
Total assets . . . . .. .. . ... . . . .. .. . . ... .. .. . .. . . . .. .... . . .... . ..... .. . . .
- --
$73 ,535
$61 ,578

Notes payable, current and other current borrowings ... . . . ... . .... ... . . . . . . .
Accounts payable .. .. . . . . . ... .. ... . . . . .. .... . . .. .. ... .. . . .. . . .. . .. .. .
Accrued compensation and related benefits .. .. . ... . . . .. . .. ...... . . . . . .. .
Deferred revenues . . . . .. ... . . . . . . . .. . . . . .. . . . ... .. . . . . .. . . . . .. . .. . . . .
Other current liabilities . ... . . . . . . . . .. . .. . . . .. .. .. .... .. . . . . . . . . .. . . .. .
$1 , 150
701
2,320
6,802
3,219
$3,145
775
1,895
5,900
2,976
14,192
14,691
2009
$ 7,533
13,092
$ 7,123
11 ,754
18,877
Total current liabilities ..... . .. . . . . . . .. . ... . .. .. . . .... .. .. . . .. . . .. . . . ..

Non-current liabilities
Notes payable and other non-current borrowings . . . . . .. . .. . .. .... . . . .. .. ..
Income taxes payable .. . .... . . . .. . . . . . .. .... . . . . . .. .. ... . . .. ... . ....
Deferred tax liabilities . . .. . . . ... . . ... .. ... .. . ... . . . . . . . . . .. .. .. . . .. ...
Other non-current liabilities . .. .. . .. . .. . . . . . . . .. ... .. . ... . .... .. . . .... .
.
.
.
.
14,772
3,169
59
1,098
11 ,510
2,695
424
1,059
4,375
Total non-current liabilit ies . . . . . .. . . .. . ... .. .. . . . ..... . . . . . .. . . ... . .. . . .
19,098
15,688
- - -
24,031
4,382
2,562
20,625
1,506
784
Hardware systems revenues . . . . . . ... . . . . .... . .. .. .. . .. . .... . ..

Services . . . . . . . . ..... . . ..... . . . . . . ... . . ... . . . .. .. ... .. ..... .
6,944
4,647
2,290
3,905
35,622
26,820
Total revenues .. .. .. .. . . . . .... ... . . . . .. . . .. .. . .. . .... . . . . . . . .
2010
2010
Software revenues . .. . . . . ... . . . . . ... . . . .. ... . . . .. . . . .. . .. . . .. .

Hardware systems products . . . . . . ... . . . . ... . . .. . . . ... .. . . . .. . . .
Hardware systems support . . .. ... .. . . ... .. . . . . . . . ... . ...... . . . .
- --
2011
- - -
(L02, 3, 4)
Coneoldatecl Statements of Operations
- --
$ 6,135 . $ 5,593
Consolidated Balance Sheets

May 31 (In miHions, except per share data)
Net operating profit after tax (NOPAl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,266
---
4,638
1,088
23,252
continued
continued
11-64
11-65
Oracle Corporation stockholders' equity

Preferred stock, $0.01 par value-authorized : 1.0 shares; outstanding: none
Common stock, $0.01 par value and additional paid in capital-authorized:
11 ,000 shares; outstanding: 5,068 shares and 5,026 shares as of
May 31 , 2011 and 2010, respectively . . . . . . .. . . . .. . . . . .. .. . ... . ..... . . . .
Retained earnings . .. .. . . . . .. . .. .. . .. . . . ... . . . .... ... . .. . . .. . .. . .. . . .
Accumulated other comprehensive income .. .. . . .. . . .... . ..... . .... . ... . . .
16,653
22 ,581
542
Total Oracle Corporation stockholders' equity .. . ... . . . . .. . . .. . ... .. .. . ... . .

Noncontrolling interests . .. . . .. .... . . .. . ... . . . .... . ..... . . .... .. . . . .. . .
39,776
469
Total equity . . . .. . ... . . . . . ... . . .. . . ... .. .. ... . . . . .. ... ... . .. . . ..... . .
---
Total liabilities and equity .. . .. ... ... .. . ... . .. ... . ... . .. . . .. .... . . . . . . . .
$73,535
May 31 (In mllllons)
40,245
14,648
16,146
30,798
401
--
31,199
$61,578
==
Required
Forecast Oracle's fiscal 20 12 income statement , balance sheet, and statement of cash flows; round
forecasts to $ millions. Hint: We forecast total revenues by proj ecting a co ntinuati on of year-over-year
percentage growth rates for each reve nue category th at O racle incl udes in its income statement (rounded
to the nearest w ho le percent) . (Note: O racle 's lo ng-term debt footnote reports that current maturities
of long-term debt are $ 1,250 million for May 20 12 ; Oracle inc ludes the c urrent maturiti es with " Notes
payable, curre nt and other current borrow ings" on its balance sheet. O rac le reports capi tal expend itures
of $450 million , di v idends of $ 1,06 1 million , deprec iation of $368 m illio n , w hich it includes in G&A
expense, and amo rti zation of $2,428 million , whi ch it reports separately. Identify all fin ancial statement
relations esti m ated and assumpt ions made; estim ate forecasted inco me statement relations to l decimal
(assume no change for : interest expense , nono perating inco me, deferred tax assets and liabilities, goodw ill , no ncontro lling interest , common stock , and accumul ated other comprehensi ve income). W hat do
~ J Pll-31.
the forecasts imply about the fi nanc ing needs of O racle?
Forecasting the Income Statement, Balance Sheet, and Statement of Cash Flows
(L02, 3, 4)
Fo llowin g are the fin ancial statements of Nike, Inc.
NIKE, INC.
(NKE)
Consolidated Statements of Income

2010
2009
Revenues . .. . .. ... . . . ... . . . . .. . . . . . .. . . . . . . .. .. . . .. . .. . $20,862

11 ,354
Cost of sales .. . . . ... . . . .... . . . .. . . . . ... . .... .. ...... . .. .
$19,014
10,214
$19,176
10,572
Gross margin .. . .. ... . ...... . .... . .. . . . . . .. . ... . . ...... .

Demand creation expense . ..... . . . . . . .... . . . . .. . .. . ... .. . .
Operating overhead expense ... . . . . . .. .. ..... .. . . . . .. . . .. . .
9,508
2,448
4,245
8,800
2,356
3,970
8,604
2,352
3,798
Total selling and administrative expense ... . .. . ..... ... . . . .. . .

Restructuring charges .. . . ..... . . .. .. . .. .... .. .... . . . . . . . .
Goodwill impairment ... . .... . ... . . . . . . . . .. . . .. . ... .. . ... .
Intangible and other asset impairment .. .... . ... . . . . . . ... .. . . .
Interest expense (income}, net .. . ... .... . . .. . . . . . . . . . ..... . .
Other (income} , net . ... . . . .. . .......... . . . .... .. . .. . .. . .. .
6,693
6,326
4
(33)
6
(49)
6,150
195
199
202
(10)
(89)
Income before income taxes . .. .. .. ... .. ... . .. ....... .. .. . .

Income taxes . . . . .. .. . . . . .... . .. .... .. .... .. . . . . ... . . .. .
2,844
711
---
2,517
610
- - -
1,957
470
$ 2,133
$ 1,907
$ 1,487
Year ended May 31 (In millions)
Net income . . .. . ..... . ....... . . ..... . .. . .. .. .. . . . . . .... .
2011
'1
v
.J
v
Assets
Cash and equivalents . .... . . . ..... .. ... . .. . . . ..... .. . . . .. ... . ..... .
Short-term investments ... . ......... . . . . . . . . ...... .. ... ... . . .. . . . ..
Accounts receivable, net .... ... . ... . . . .. . .. . .. .. . . .. . .. . . . . . . ... .. .
Inventories . . . .... ... . . . . .... . ... . ... . ... . . . . . ..... .. . .. . . .. . .. . .
Deferred income taxes ...... . . ... .... . . . . . . .. . . . .. .. . .... . .. .. . . . . .
Prepaid e~penses and other current assets . . ..... . . . .. .... .. . .. . . . .... .
2011
2010
$ 1,955
2,583
3,138
2,715
312
594
$ 3,079
2,067
2,650
2,041
249
873
Total current assets ..... . . . ....... .... .. ... . ....... . . . . ... . . . . . . . .

" Property, plant and equipment, net . . . . ... . .. ... . . .... .. .. . .. . . . .... . .
0
Identifiable intangible assets, net . . ... . ... . . . ..... .... . . .. . . . .. . ... . . .
Goodwill . . . . . . .. . . .. . . . . .. . . . .. .. . . ...... .. . .. . .. . . .... . ... . . .. .
.J Deferred income taxes and other assets . . . . . . ......... . ... . . . .. . . . . . . .
205
894
873
Total assets . ..... . ... . .. . . . .. . .. .. .... . ... .. .. . . . . .... . . . ...... . .
$14,998
$14,419
Liabilities and shareholders' equity

Current portion of long-term debt ...... . . .... ... .. .. .. . .. . .. . . . .. . . . .
v Notes payable . .. .. . .... . .. ...... .. . .. . . . . . . . ........ . . . ........ .
v' Accounts payable . ..... . . ...... . . .. . .... . . . .... . ........ . .. . .. . . . .
v Accrued liabilities . .... . . . . . ... . .. ... ... . ... . . .. . . . . . . . .. .. .. .... . .
o Income taxes payable . . .. . . . ............ . . . . . .. ... . . . .. .. ... .. .. . .
Total current liabilities . . . .. . ......... . . . .. . . . . . ... . . .. . . .... . . . . . ...
Long-term debt .. .. .. . . . . . . . . . .. ... . . . . . .. . . .. . .... ... . . . . . .. . . . .
Deferred income taxes and other liabilities . .. . .... .. . . . . . . .. . . . . . .. . .. .
Redeemable Preferred Stock ..... . .... . . .. . . ... .. .. ...... . ..... . ... .
Common stock at stated value
Class A convertible - 90 and 90 shares outstanding .... . .. . . . . . .. . ... .. .
Class B - 378 and 394 shares outstanding . . . . . . . .. . . ... . . .. . .. . . . . .. .
Capital in excess of stated value . . . . . ... . .......... . .... . . .. . .. . . .. . .
Accumulated other comprehensive income . ..... . ........ ..... . . . .. . . . .
Retained earnings . ........ . . . ... . .. .. .. . . . ......... . . . .. . .... ... .
Total shareholders' equity .... . . .. . .. ....... . . . .. . .. . . . .. . .. . .. .... .
Total liabilities and shareholders' equity .. . . .. ...... ............ . .. . ... .
10,959
1,932
467
200
187
1,469
1,985
117
188
7
139
1,255
1,904
59
3,958
276
921
3,364
446
855
3
3,944
95
5,801
3
3,441
215
6,095
9,843
9,754
---
- - -
$14,998
$14,419
Required
Forecast N ik e's fiscal year 20 12 income statement, bal ance sheet , and statement of cash flows. Round
t~e re : enue growth rate. to th e ~ea rest whole re rcent and round fo recasts to $ millions. Identify all
f inancial statement relati ons estimated and assumptions made; estimate forecasted incom e statement
rela_
t ion_s to I decimal (assume no change for: other ex pen ~ in~ome, interest exense ~mon stock ,
stated value, and accumulated other com rehensi ve income). For fiscal 2011 , capital
ca ital ~ n excess
expendi tures ar e $432 million , depreci ation expense is $335 m i llion , am ortization i s $23 million , and
d ividends are $555 mi llion . Footnotes reveal th at the current porti on on long-term debt due in 201 3 is
$48 million. Wh at do the forecasts imply about Nike's fi nancing needs for the upcoming year?
11-66
11-67
Pll-32. Forecasting the Income Statement, Balance Sheet, and Statement of Cash Flows (L02, 3, 4)
HOME DEPOT, INI:.
continued from p rior page
Following are the fi nanci al statem ents of Home Depot, Inc.
(HD)
Consolidated Statements of Earnings
For Fiscal Year

Amounts in millions, except per share data
January
30,2011
January
31, 2010
Net sales .... ... . . . . . . .. ...... .. . .. .. . . . . . .. . . . . . . .... ... . .... . .

Cost of sales .. . . .. . ... . . . . . .. . . .. .. . . . . . ... .. . . . . . ... . . . . . . .... .
$67,997
44,693
$66,176
43,764
Gross profit ... . .. .. . .. .. . . .. ... ... ... . . . .. . . . . . .. ...... . ..... . . .

Operating expenses
Selling, general and administrative . . .. . . . .... . ... .. . .. . .. . .. . . . .... .
Depreciation and amortization . . .... . . . .. . .. .... . .. . . . . . . . . . . .. .. . . .
23,304
22,412
15,849
1,616
15,902
1,707
Total operating expenses . ... . . .... .. . .. . .. . . . .. . . . . . . ..... . .. . . . . .
17,465
17,609
Operating income ... . ... ...... . . . .. .. . . .. ... .. ... . . .... . . . . . . ... .

Interest and other (income) expense
Interest and investment income .... .... .. . .... . . . ... . .. . . . . . .. . .... .
Interest expense . . ... .... . . .. ... .... .. . . ... .. . . . .... . . . .. ...... . .
Other . . . . .. . . .... . . ... .. .. . .. . .. .. . . . .... . . . . ...... . . . .. ... .. . .
5,839
4,803
(15)
530
51
(18)
676
163
Interest and other, net .. . . .... . . . ... .. . . . . .. .. . . .. . . . . . . .. ..... . . .
566
821
769
Earnings from continuing operations before provision for income taxes .... . .
Provision for income taxes . . . .. ... .... . . . . . . . . . .. . . . . . . ... . . .. . ... .
5,273
1,935
3,982
1,362
3, 590
1,278
Earnings from continuing operations . .. . . .. .. . . . . . . . . . . . . . ...... . . .. .

Earnings (loss) from discontinued operations, net of tax .. . .. . .. . .. . ... . . .
3,338
2,62 0
41
2,312
Net earnings . . . ... . .. .. . . . .. . . . .. .. . . . .. .. . . . . . . . .. . .. .. . . ... . . .
$ 3,338
---
Amounts In millions, except share and per share data

Assets
Cash and cash equivalents . . .. .. . . ..... .. .. . ..
Receivables, net .. ... . .... . . .. . . ....... . . . .. .
Merchandise inventories . .......... .. . .. . . . . . .
Other current assets .. .. .... . .. .. ... . .. . . . . .. .
19,631
4,359
(18)
624
163
---
$ 2,661
$ 2, 260
- --
January
30, 2011
Januarj
31,~
545
1,085
10,625
1,224
$ 1,421
964
10,188
1,327
Total current assets .. . . .. . .. . . . . . . .. . .. . . . .. .. . . . .. . . . . ... . ... . . ... . .. .
13,479
13,900
Property and equipment, at cost:

Land . ... . . ....... . .. ... .... . . . . . . ... . . . . .. . .. . ..... .. .... . .....
Buildings . . . . . . . ... ... .. . . . ... .. . . .. . . . . .. . ... .. . .. . . .. . .. .. . . . . . .. . .
Furniture, fixtures and equipment . . . . .... . . .. ..... . ..... .. . . . .. ... . . . .. . . .
Leasehold improvements ... . .. . .. . . . . . .. . .. .... . . .. .... . . . . .. . . . .. .. .. .
Construction in progress . ... . . . . .. . .. . . . . ... . . . . .. . .. .. . .... . . ... . .. .. . .
Capital leases .. . . .. . ..... ... . . . .. ... . ..... . .. . . . . . . . . . .. . . . . . ....... . .
8,497
17,606
9,687
1,373
654
568
8,451
17,391
9,091
1,383
525
504
Less accumulated depreciation and amortization . .... . . . ... .. .. . . .. . . . . . ... . .
38,385
13,325
37,345
11 ,795
Net property and equipment . .. .. ..... . . . . .. . ..... . . . ... . .. . . .. .. . ... ... .
25,060
25,550
Notes receivable .. .. . . . .. . . ... . . . . . .. . . . .. . . ... ... . . . . ... . .. .. . .. . .. .. .

Goodwill ....... .. . . . .. . ... .. ...... .. . ........ . . .... . . . . . ... . .. . . ... . .
Other assets . ... . . ... .. . . . . . . .. .. .. .. .... . .. .. . . . . .... . . ..... . . . . . . . . .
139
1,187
260
33
1, 171
223
Total assets .. .......... . . .. . .. . .... . .. . . . . .. . . ... . . .. . . . . . . . .. . . . . . . . .
$40,125
$40,877
. .. . . . . .. . . . ... .. .. . . ... . .
. ..... ... . .. .... . ..... . . . . .
. . . . . ... .... . . .. . . . .. . . . . .
.. . .. . . . .. ... .. . . .. . . . .. . .
11 -68
Liabilities and stockholders' equity

Accounts payable .. .. ... . . . . . . . .. . .... . . . . .. . . . .... . .. .. . .. . .. .. .. . . . . .
Accrued salaries and related expenses . . . . . . . . . . . . . ... .. .. ... . ... . .. .. . ... .
Sales taxes payable .... ... .. . . . .. ... .. .... . . . .. .. .. .. . . . . . . . . ... .. .. . . .
Deferred revenue . . . . . . . .... . .. . .. . .. . . . . .. .. . .... ... .. . . .... . . ... . .. . .
Income taxes payable . ... . . . . . . . . .. . ..... . . . . . .... .. . . . . . ... . . . . . .. ... .
Current installments of long-term debt .... . . .... . .... . . .. . . . .. ... . .. . . .. . . .
Other accrued expenses . .. . . . . ... .. . . . . .. .. . ..... . . ... . .... . . . . . . .. . .. .
$ 4,717
1,290
368
1,177
13
1,042
1,515
$ 4,863
1,263
362
1,158
108
1,020
1,589
Total current liabilities . ... . ... .. .. . . . . . . . . . .. . . . .. . .. : . . .. . . . .. . . . . . . ... .

Long-term debt, excluding current installments .. . . . . . ..... . . . . ..... .. .. . . .. .
Other long-term liabilities .. . ... . . .. . .. . .. . . .. . . .. . . .. . . . ...... . .. . . . ... . .
Deferred income taxes .... . ... . .. . . .. . . . . .. . . . . . . . . . . ... . . . . . .. . .. ... . . .
10,122
8,707
2,135
272
10,363
8,662
2,140
319
Total liabilities . . . . . ..... . . . . . .. . . ... . . . . .. ... . ... ... . .. . . . .. . . . .. ... . . .

Stockholders' equity
Common stock, par value $0.05; authorized : 10 billion shares; issued: 1.722 billion
shares at January 30, 2011 and 1.716 billion shares at January 31 , 201 O;
outstanding : 1.623 billion shares at January 30, 2011 and 1.698 billion shares at
January 31 , 201 O . . . .. ..... ... . . . .. . ... .. ... . . .. .. . . .. . . . .. . . .... .. . .
Paid-in-capital . . . .. .. . .. . .. . . .. . . . . . .. . .... . ..... . .. . . . . .. . . .. . . . . . . . .
Retained earnings . . . .. . ..... . .... .... .. .. . . . . .... ... . .. . . .. .. .... . . . . .
Accumulated other comprehensive income ... . ...... . . .. . .. . . .. .... . . . . .. . .
Treasury stock, at cost, 99 million shares at January 30, 2011 and
18 million shares at January 31 , 201 O . . . .. .. . . . . . .. . . . .. . . . . ... . . ... . . . .
21 ,236
21,484
86
6,556
14,995
445
86
6,304
13,226
362
(3,193)
(585)
Total stockholders' equity .. . ... . . .. . ..... . . . . . . . . . .. .. . ... ... .. .. . . . .. . .
18,889
Total liabilities and stockholders' equity . . . .. . . ... . .. ..... . ... .... . . . . . . .... .
$40,125
- --
19,393
- -$40,877
Required
Forecast H ome D epot's fiscal year ended January 2012 incom e statement, balance sheet , and statement
of cas h flows . R ound the revenue growth rate to the nearest w hole percen t , and round forecasts to $ millions. Estimate forecasted incom e statement relations to I decim al (assume no change for : notes receiv abl e, good w ill , i nterest income and expense, deferred i ncome taxes , common stock and additional paid-in
capital , treasury stock , and accumulated other comprehensi ve income). Capital expenditures were $ l ,096
million and di v idends were $ 1,569 million for fiscal year ended January 20 11 . H ome D epot 's lo ng-term
debt footnote i ndicates maturities of l ong-term debt of $29 million for 20 12. What i s our assess ment of
H ome D epot 's fi nancial condition over the next year?
Tuo-Year-Ahead Forecasting of Financial Statements
(LOS)
Follow ing are the fin anci al statem ents of Target, Corp.
TARGET CllRP.
continued
Consolidated Statements of Operations

For fiscal year ended (millions, except per share data)
Jan. 29, 2011
(TGT)
Jan.30,2010
Jan.31,2009
Sales . . .. . . .. .. . . . . . . . . .. .. . ..... ...... . . ... . ... .. .

Credit card revenues . ..... . . . .. . ... . .... ...... .. . . . . .
$65,786
1,604
$63,435
1,922
$62 ,884
2,064
Total revenues . . . . ...... . . .. .... . .. . .... . .... ... . . . .

Cost of sales .. .. ..... .. . . . . .. . .... .. . . . .. . .. ...... . .
Selling, general and administrative expenses . . .. .... . . . .. .
Credit card expenses .. ... ... .. . . . .. . .. .. . . . . ... ... .. .
Depreciation and amortization .. .... . . . . . ... . . . . .. . .. . . .
67,390
45,725
13,469
860
2,084
65,357
44,062
13,078
1,521
2,023
64,948
44,157
12,954
1,609
1,826
Earnings before interest expense and income taxes .. . . . . . . .

Net interest expense
Nonrecourse debt collateral ized by credit card receivables . .
Other interest expense .. . .. . . .. ... .. . ... . ... . . ... .. .
Interest income . . .. . ... . . . . . .. . .. . .. . ..... ... ... . . . . .
5,252
4,673
4,402
83
677
(3)
97
707
(3)
167
727
(28)
Net interest expense . . . .. . . . .. . . .. . . ... . ... .. .. . . ... .
757
801
866
Earnings before income taxes . . . .. . . . . . . ... . . . . . .. . . . . .

Provision for income taxes . . . . . ... . . .. . . . . ..... . ..... . .
4,495
1,575
3,872
1,384
3,536
1,322
Net earnings .. . . . . . ..... .. . . .. ... ... . .. . . . . ...... . . .
- --
$2,920
- --
$2,488
--$2,214
11-69
11-70

Consolidated Statements of Financial Position
Investing activities
Expenditures for property and equipment ........ . . . .... . .
Proceeds from disposal of property and equipment . . ..... . .
Change in accounts receivable originated at third parties . . ...
Other investments ... ... ...... ..... . . ... .... . . .... . . .
January
29, 2011
(millions, except footnotes)

Assets
Cash and cash equivalents, including marketable securities of $1 ,129 and $1 ,617 .. . .
Credit card receivables, net of allowance of $690 and $1,016 . . .. .... ......... .. .
Inventory ........... . ...... . ............. .. . . . .... .. .......... ..... .. . .
Other current assets .. . .. . ........... .... . .. . . .... .. ....... . .... .. .. ... .
Total current assets . ... .... . ...... ..... . . . .... .......... .. .... . . . .. . .. . .
Property and equipment
Land . ... ..... .. ... . . . ........ . ..
Buildings and improvements ..... . .. . ... . . . ......... . .. ... .... . ....... .. . .
Fixtures and equipment . . . . . . ... ....... .. ... . .. .. ....... ..... ... . .. .... . .
Computer hardware and software . .. . . . .... ... . . .. . ...... . ... .. ..... ......
Construction-in-progress ..... . ....... . ... . ... . . . ..... . . .. ... . .. ... ...... .
Accumulated depreciation .... .. ..... . .. . ........... . .... .. ....... . . . .... .
$1 ,71 2
6,153
7,596
1,752
17,213
5,928
23,081
4,939
2,533
567
(11,555)
5,793
22,152
4,743
2,575
502
(10,485)
Property and equipment, net .... .. .... .. . . ... ............... .. ... .. . .. . .

Other noncurrent assets ....... .. ......... . ......... . .... .. .... . ..... . ...
25,493
999
25,280
829
Total assets ....... .. ....... .. ............... . ... ..... ........ . ..... . .. .
$43,705
$44,533
Liabilities and shareholders ' investment

Accounts payable ....... .. ... ............... . ... ........ ... .. ...... . ... .
Accrued and other current liabilities .... . .. . .......... . ........... . .. ... ....
Unsecured debt and other borrowings ...... . ................ ... .. . ... . ... . .
Nonrecourse debt collateralized by credit card receivables . . . . . .. .............. .
$6,625
3,326
119
$6,511
3,120
796
900
Total current liabilities . ............ . . ............. . ........ .. ..... . ...... .

Unsecured debt and other borrowings ..... . ......... .. ... . . . .. ... . .. ...... .
Nonrecourse debt collateralized by credit card receivables . .... .. ....... .. ... . . .
Deferred income taxes . . . ..... .. . . .... . .. . ..... .. ....... . . .. ..... . .... ..
Other noncurrent liabilities . .. .. ...... .... .. . .... .. .... . ........ . ...... .. . .
10,070
11 ,653
3,954
934
1,607
11,327
10,643
4,475
835
1,906
Total noncurrent liabilities .... . .. . ...... ... .... . .......... . ...... .. . . ... .. .
Shareholders' investment. . . .. .. . ...... .... . . . ... .. . ... .. ....... .. . ...... .
Common stock .. . ........ . ... . ...... . . . .. . . .... ..... .. ............. . .
Additional paid-in-capital . . . . . ..... .. ... . . . ... .. .... .. ... .. .. ......... . .
Retained earnings ..... ... . ......... . . ....... . ..... .. .... . ...... . . . . ...
Accumulated other comprehensive loss . ... . . .... .... .. . .. ...... . .... ... ...
18,148
17,859
59
3,311
12,698
(581)
62
2,919
12,947
(581)
Total shareholders' investment. .. .. .... . . . . . .. .... .. .. ......... ... .. . .... .
15,487
--$43,705
15,347
Total liabilities and shareholders ' investment ... ... ... ........ . . .. .. .......... .
$44,533
.
.
.
.
(2,129)
69
363
(47)
(1,729)
33
(10)
(3,547)
39
(823)
(42)
(1 ,744)
(1 ,703)
(4,373)
.
.
.
.
.
.
.
1,011
(2,259)
(609)
(2,452)
294
(1,970)
(496)
(423)
47
Cash flow required for financing activities ... ............... .
(4,015)
(2,842)
(1,643)
Net increase/(decrease) in cash and cash equivalents . . .... . .

Cash and cash equivalents at beginning of year .. ... . . . .... .
(488)
2,200
1,336
864
(1,586)
2,450
Cash and cash equivalents at end of year .... ... .... . ... . . .
$ 1,712
$ 2,200
Cash flow required for investing activities .... .... .. . . . . . . .

Financing activities
Reductions of short-term notes payable ....... . ..........
Additions to long ~term debt . ... . ..... ..... ....... . .. . : .
Reductions of long-term debt ....... .......... . .... .. ..
Dividends paid .. . . . .. ................... . .... . . . ....
Repurchase of stock .. .. ...... ... . . ... ....... ...... . .
Stock option exercises and related tax benefit .......... . ..
Other. .... . . ..... . ... ........ . . . ..... . .. ....... ... .
(500)
3,557
(1,455)
(465)
(2,815)
43
(8)
864
Required
Forecast Target's fiscal year ended January 2012 and 2013 income statements, balance sheets, and statements of cash fl ow. Round the revenue growth rate to the nearest whole percent , and round forecasts to
$ millions . Use the same forecasting assumptions for both years; estimate forecasted income statement
relations to 1 decimal (assume no change for: int~ expef!S~deferred~ome t~bility, common
stock additional aid-in ca ital and accumulated other comprehensive income). Targ~term
ebt footnote indicates maturities of ,25Tmillion in fi sca year en ed January 2012, and maturities
of $3 ,812 mjllion in fi scal year ended January 2013. Assume return on investments of I .5% for average increase in investments. What investment or financing assumptions are required for forecasting
purposes? What is our assess ment of Target's financial cond ition over the next two years?
Adjusting the Income Statement Prior to Forecasting (l01, 2)

Following is the income statement of CBS Corporation , along with an excerpt from its MD&A section .
CBS CORPORATION
(CBS)
Consolidated Statements of Cash Flows

Jan. 29, 2011
For fiscal year ended (millions)
Operating activities
Net earnings .. .. ..... . ............ . .... .... .. ... .... .
Reconciliation to cash flow
Depreciation and amortization ...... . ..... ........ .. ....
Share-based compensation expense . . . ................. .
Deferred income taxes . .. .... . .......... . .......... . .. .
Bad debt expense .. . ............ . ............. ... ..
Non-cash (gains)/losses and other, net . .... . . .. ... ..... . . .
Changes in operating accounts:
Accounts receivable originated at Target .. . ......... . .. .. . .
Inventory . ................. .. ..... .. .. ... .... . .. .... .
Other current assets ........ ... .... . . ............... ..
Other noncurrent assets ...... .. ...... ... .. .. .......... .
Accounts payable .. .... . ......... . . . ... .. ... .... . .. .. .
Accrued and other current liabilities ..... .. . . ....... . .... . .
Other noncurrent liabilities . .... .. . ....... ...... .... ... .
Cash flow provided by operations . . . . . . . . . . . . . . . . . . . . . . . .
$2 ,920
2,084
109
445
528
(145)
(78)
(417)
(124)
(212)
115
149
(103)
5,271
Jan. 30, 2010
Jan. 31,
2009,
Income Statement
Year ended December 31 ($ millions)
Revenues ..... . .. . . . . .. . .... . . ... ..... .... .
$2,488
$2 ,214
2,023
103
364
1,185
143
1,826
72
91
1,251
316
(57)
(474)
(129)
(114)
174
257
(82)
5,881
(458)
77
(99)
(55)
(389)
(230)
(186)
4,430
continued
2005
$14,536.4
2004
$14,547.3
2003
$13,554.5
Expenses
Operating ... .. .... . . . .............. . .... .
8,671.8
8,643.6
8,165.4
Selling, general and administrative .... .. .... . . .
2,699.4
2,552.5
2,376.1
Impairment charges . . .. . . .. . ...... . ...... . .
9,484.4
17,997.1
Depreciation and amortization ............... .
498.7
508.6
501.7
Total expenses . . . ..... ..... . ............. .
21 ,354.3
29,701.8
11,043.2
Operating income (loss) . ..................... .
$ (6,817.9)
$(15,154.5)
$ 2,511.3
11-71

Operating Expenses: Table below presents consolidated operating expenses by type
Increase
Operating expenses by type
Year ended December 31
(Decrease)
2005 vs. 2004
2005
2004
Programming ...... . .... . ....
$3,453.2
$3,441.8
$ 11.4
- %
$3,080.3
$361.5
Production . . . . . . .. .. ... . . .. .
2,453.5
2,584.7
(131.2)
(5)
2,661 .9
(77.2)
Outdoor operations . .. .. . . ... .
1,134.2
1,102.7
31.5
1,012.6
90.1
Publishing operations . . . . .. ... .
525.0
517.6
7.4
486.3
31 .3
Parks operations .. . .. .. .. . . . .
243.8
232.7
11.1
212.2
20.5
712.1
52.0
-$478.2
-
Other..... .. .. .... . . .. . ... . .
862.1
764.1
Total operating expenses .... . ..
$8,671 .8
$8,643.6
98.0
--$ 28.2
5
13
- %
2003
$8,165.4
6
10
7
6%
For 2005, operating expenses of $8.67 billion increased slightly over $8.64 billion in 2004. For 2004,
operating expenses of $8.64 billion increased 6% over $8.17 billion in 2003. The maior components
and changes in operating expenses were as follows :
Programming expenses represented approximately 40% of total operating expenses in _2?05 and
2004 and 38% in 2003, and reflect the amortization of acquired rights of programs exh1b1ted on
the broadcast and cable networks, and television and radio stations. Programming expenses
increased slightly to $3.45 billion in 2005 from $3.44 billion in 2004 principally reflecting higher
costs for Showtime Networks theatrical titles. Programming expenses increased 12% to $3.44
billion in 2004 from $3.08 billion in 2003 reflecting higher program rights expenses for sports
events and primetime series at the broadcast networks.
Production expenses represented approximately 28% of total operating expenses in 2005, 3 0 ~
in 2004, and 33% in 2003, and reflect the cost and amortization of internally developed telev1s1on
programs, including direct production costs, residuals and participation expenses, and production
overhead, as well as television and radio costs including on-air talent and
.
other production costs. Production expenses decreased 5% to $2.45 billion in 2005 from $2.58 billion in 2004 principally reflecting lower network costs due to the absence of Frasier partially offset
by increased costs for new network series. Production expenses decreas.ed 3% to $2 .58 billion in
2004 from $2.66 billion in 2003 reflecting fewer network series produced 1n 2004 partially offset by
higher news costs for political campaign coverage.
.
.
Outdoor operations costs represented approximately 13% of total operating expenses. 1n 2005
and 2004, and 12% in 2003, and reflect transit and billboard lease, maintenance, posting and
rotation expenses. Outdoor operations expenses increased 3% to $1 .13 billion in 2005 from
$1 .1O billion in 2004 principally reflecting higher billboard lease costs and maintenance costs
associated with the impact of hurricanes in 2005 . Outdoor operations costs increased 9% to
$1 .1O billion in 2004 from $1 .01 billion in 2003 primarily reflecting higher transit and billboard
lease costs.
Publishing operations costs, which represented approximately 6% of total operating expenses
in each of the years 2005, 2004 and 2003, reflect cost of book sales, royalties and other
costs incurred with respect to publishing operations. Publishing operations expenses for 2005 .
increased 1% to $525.0 million and increased 6% to $517.6 million in 2004 from $486.3 million in
2003 primarily due to higher revenues .
.
.
Parks operations costs, wh ich represented approximately 3% of total operating expenses. 1~ each
of the years 2005, 2004 and 2003, increased 5% to $243.8 million in 2005 from $232 .7 million in
2004 principally reflecting the cost of fourth quarter 2005 winter events held at the parks and the
impact of foreign currency translation. In 2004, Parks operations costs increased 10% to $232.7
million from $212 .2 million in 2003 primarily from the impact of foreign currency translation.
Other operating expenses, which represented approximately 10% of total operating expenses in
2005 and 9% in 2004 and 2003, primarily include distribution costs incurred with respect to tel evision product costs associated with digital media and compensation . Other operating expenses
increased 13% to $862.1 million in 2005 from $764.1 million in 2004 primarily reflecting a 10%
increase in distribution costs due to the DVD release of Charmed and increased costs associated
with digital media from the inclusion of Sportsline.com, Inc: ("Sportslin e.com") since ~ts ac.quisition in December 2004. Other operating expenses for 2004 increased 7 0Yo to $764.1 m1ll1on 1n
2004 from $712 .1 million in 2003 principally reflecting 15% higher distribution costs due to additional volume of DVD releases of the Star Trek series and higher compensation.
continued
Impairment Charges SFAS 142 requires the Company to perform an annual fair value-based impairment test of goodwill. The Company performed its annual impairment test as of October 31 , 2005,
concurrently with its annual budgeting process which begins in the fourth quarter each year. The
first step of the test examines whether or not the book value of each of the Company's reporting
units exceeds its fair value. If the book value for a reporting unit exceeds its fair value, the second
step of the test is required to compare th e implied fair value of that reporting unit's goodwill with the
book value of the goodwill. The Company's reporting units are generally consistent with or one level
below the operating segments underlying the reportable segments. As a result of th e 2005 annual
impairment test , t he Onmpany recorded an impairment charge of $9.48 billion in the fourth quarter of
2005. The $9.48 billion reflects charges to reduce the carrying value of goodwill at the CBS Television
reporting unit of $6.44 billion and the Radio reporting unit of $3.05 billion . As a result of the annual
impairment test performed for 2004, the Company recorded an impairment charge of $18.0 billion in
the fourth quarter of 2004. The $18.0 billion reflects charges to reduce the carrying value of goodwill
at the Radio reporting unit of $10.94 billion and the Outdoor reporting unit of $7.06 billion as well as
the reduction of the carryi ng value of intangible assets of $27.8 million related to the FCC licenses
at the Radio segment. Several factors led to a reduction in forecasted cash flows and long-term
growth rates for both the Radio and Outdoor reporting units. Radio and Outdoor both fell short of
budgeted revenu e and operating income growth targets in 2004. Competition from other advertising
media, including Internet advertising and cable and broadcast television reduced Radio and Outdoor
growth rates. Also, the emergence of new competitors and technologies necessitated a shift in management's strategy for the Radio and Outdoor businesses, including changes in composition of the
sales fo rce and operating management as well as increased levels of investment in marketing and
promotion.
Required
Identify and explain any income statement line items over the past three years that you believe should
be considered fo r potential adjustment in preparation fo r fo recasting the income statement of CBS .
Forecasted 2011 financial statements for Colgate-Palmolive follow.

Forecaated Income Statement
year ended December 31 ($ mlllions}
Forecast
2010
Assumptions
2011 Est.
Net sales . . . . . . .... . . . .. . ... ... . . . ..... .. .. .. .. .. . . .

Cost of sales . . ...... . . . . .. .. . . .. ...... . . .. . . . . .. ... .
$15 ,564
6,360
$15,564 x 1.03
$16,031 x 40.9%
$16,031
6,557
Gross profit. . . . . . .. . . ...... .. .. . .. .. . . . . . .. . .... .. . .

Selling, general and administrative expenses .. . . .. .. .. . . . .
Other (income) expense, net . . .. . .. . . . .. . . .. . . . . . .. . . . .
9,204
5,414
301
subtotal
$16,031 x 34.8%
no change
9,474
5,579
301
Operating profit . . ... . . . .. . ..... . .. . . . . .. . ... . . . . . . . .

Interest expense, net . .. . . ... . ... .. . . . . . . ... . . .. . . ...
3,489
59
subtotal
no change
3,594
59
Income before income taxes . . . . . . . ..... . . . . ... . .. .. ..

Provision for income taxes . . . . . . . .. . . .. . . .. . .. . .. . .. .. .
3,430
1,117
subtotal
$3 ,535 x 32 .6%
3,535
1,152
Net income including noncontrolling interests .. .. . . ... .. .. .

Less: Net income attributable to noncontrolling interests . . . . .
2,313
110
subtotal
no change
Net income attributable to Colgate-Palmolive Company ... . . .
$ 2,203
subtotal
--2,383
110
--$ 2,273
---
11-72
11 - 73

Forecasted Balance Sheet
Forecasted Statement of Cash Flows
1,610
1,222
408
computed
16,031 x 3.1%
plug
16,031 x 10.3%
16,031 x 7.9%
16,031 x 2.6%
Total current assets ... . .. . . .. . . . . . . . .. ..

Property, plant and equipment, net .. . . . . . . . . . .. .. .
Goodwill, net . . . . .. . .. . . ..... . . .. . .. .
Other intangible assets, net . ... . . . .. . . .. .... .
Other assets . . .. . . . . . . .. . .. . .. . . . . . . . . .
3,730
3,693
2,362
831
556
subtotal
3,693 + 567 - 375
no change
831 - 19
16,031 x 3.6%
Total assets . . . . . . . ... .. . .. . . . . . .. .
$11 ,172
Assets
Cash and cash equivalents ... . .. . . . . . .... . . . .
Marketable securities . . . . . .. . .. . . . .. .... .
Receivables . .. . . . . . ... . . .. . . . . . . . .. . . ..
Inventories ... . .... . .... .. . . . . . . . ..
Other current assets . .. . . . . .. . . . . ... . . .... .
Liabilities
Notes and loans payable .. . . .. .. . . . . .... .. .
Current portion of long-term debt ..... . . .. .. ...
Accounts payable .. . . . . . . ... .. . .. . . . . .. . . . .. . . .
Accrued income taxes ... . . .. . . .. . . .. ... . . .
Other accruals ... .. ... . . . . .. . . . . . ... . .
490
($millions)
2011 Est.
Net income including noncontrolling interests .. .

Add : Depreciation . .. . .. . . . . . ... . . . . . . . . . . .
Add: Amortization . . . . ....... .. . . . . . . . . . . . .
Change in Accou nts receivable . .. ...... .. . .
Change in Inventories . . . ... . . . . . ... . ... . .
Change in Other current assets . . . . . .. . . . .. .
Change in Other long-term asset~ . .. . . .. . . .
Change in Accounts payable . . . .. . . . . ... . . .
Change in Accrued income taxes . . . . . . . . . . .
Change in Accru ed liabil ities . . . . . . .. .. . . . . .
Change in Other long-term liabilities ... . . . . . .
via forecast income stmt.

given
given
$1 ,610 - $1 ,65 1
$1,222 - $1,266
$408 - $417
$556 - $577
$1,202 - $1,165
$281 - $272
$1,731 - $1,682
$1 ,747 - $1,704
$2 ,273
375
19
(41)
(44)
(9)
(2 1)
37
9
49
43
$11,840
Net cash from operating activities .. . .. .. .. . . .
subtotal
2,690
Capital expenditures . . . . .. . . . .. . .. . . . . .. . .
Increase in marketable securities .. . .. . . .. .. . .
given
plug
Net cash from investing activities. .. .. .. .... . .

Dividends .. . .... . . . ... .... . .... . . . . . . . . .
Payments of long-term debt . .. . . .. .. .. . .. . .
subtotal
$2,273 x 52%
prior-year current portion
(940)
(1,182)
(561 )
(1,743)
2010
As of December 31 ($ millions)
subtotal
497
373
1,651
1,266
417
4,204
3,885
2,362
812
577
48
561
1,165
272
1,682
no change
footnote disclosure
16,031 x 7.5 %
1,152 x 24.4%
16,03 1 x 10.8%
Total current liabilities . . . ..... . . .. ... . . . . .. . .

Long-term debt ... .. . . . .... . . . . . . .. . .
Deferred income taxes ... . .. . ... .. . ... .. ..
Other liabilities .. . . . . . . . . . .. . . . . . . .. .. . . ..... . . . . .
3,728
2,815
108
1,704
subtotal
2,815 - 359
no change
16,031 x 10.9%
3,621
2,456
108
1,747
Total liabilities . .... . . . . .. . .. .. . . . . . .. . . . .

Commitments and cont ingent liabilities
Shareholders' Equity
Preference stock . . .... . . . ..... . . .. . ... . . .
Common stock, $1 par value (2 ,000,000,000 shares
authorized, 732 ,853,180 shares issued) . . .. . ..... . .
Additional pai d-in-capital ..... .. . . .. .. ... .. . . . . ...
Retained earnings . . .... .. . . . . .... . .. . ..
Accumulated other com prehensive income (loss) .. ..... . ..
8,355
subtotal
7,932
733
1,132
14,329
(2,115)
no change
no change
14,329 + 2,273 - 1,182
no change
733
1,132
15,420
(2,1 15)
Shareholders ' equity before unearned

compensation , treasury stock and
noncontrolling interest .. . . ... . . . . . . . . . . . . .
Unearned compensation . .... .. . . . . .. . . ... .
Treasury stock, at cost . . .. . .... . ... . . . ..
14,079
(99)
(1 1,305)
subtotal
no change
no change
15, 170
(99)
(11,305)
Total Colgate-Pal molive Company shareholders'

equity . . . .. .. ... . . . ... . ... . ... . .. . . . . . .. . . .. .. . . . . .
Noncontrolling interests . . . . . . . .. .. . . . .. . ... . . .
2,675
142
subtotal
no change
3,766
142
Total shareholders' equity . . ... ... .. . . . . . .
2,817
subtotal
3,908
$11 ,172
subtotal
$11,840
Total liabilities and shareholders' equity . . .. .. . . . .
48
359
1,202
281
1,731
no change
(567)
(373)
Net cash from financing activities . . . . . . . . .. .
subtotal
Net change in cash . . . . . ..... . .. .. . . . .... . .

Beginning cash . .. . .. . .. .. . . . . . . . ... . . . .. .
subtotal
via prior bal. sheet
Ending cash . . . .. .. . . . . . . . . . . .. . . . . . . .. . .
subtotal
7
490
$ 497
r forecasts yield liabilities in excess of assets of $373 miUion. In this example , we assume that marketabl e
urities are increased by that amount. We might have al so assumed re payment of debt and/or purchase
treasury stock , being careful to mai ntain the company's debt-to-eq uity ratio . One further adj ustment we
'ght make at this point would be to increase interest income assuming an investment return on the marketle securities.
odule-End Review
2010
Sales (unrounded) ... .
$61,587
2011E
$64,050.48
x 1.04)
(61,587
Sales (rounded) .. ... .

NOPAT . . . ... . . . . . .
61,587
13,065
NOA . . . . . . ... . . . ...
45 ,694
2012E
$66,612.50
x 1.04)
(64,050.48
2013E
$69,276.99
x 1.04)
(66,612 .50
2014E
$72,048.07
x 1.04)
(69,276.99
64,050
13,451
($64,050 x 0.21 )
47,444
66,612
13,989
($66,612 x 0.21 )
49,342
69,277
14,548
($69,277 x 0.21 )
51 ,316
72,048
15,130
($72,048 x 0.21 )
53,369
($64,050/ 1.35)
($66,612/ 1.35)
($69,277/ 1.35)
($72,048/ 1.35)
11-74

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,...

Explain the process of forecasting

Forecast revenues and the

Forecast the balance sheet. (p. 11-19)

Forecast the statement of

Prepare multiyear forecasts of

Implement a parsimonious method for

(continued on next page)

(continued from previous page)

Module 11 I Forecasting Financial Statements

erview of Forecasting Process

rmulated (Adjusted) Financial Statements

Forecasting Financial Statements

Forecasting the Income

Forecasting financial performance is integral to a variety of business decisions ranging from

Module 11 I Forecasting Financial Statements

pl ace is meaningless if we have im precise revenue fo recasts. Consequently, borderline d ..

Crucial Forecasting Assumptions

Summary of Forecasting Process

All-Important Revenues Forecast

Module 11 I Forecasting Financial Statements

Income Statement and Balance Sheet Accounts

amics of Income Statement {and Balance Sheet) Growth

namics of Balance Sheet Growth

Module 11 I Forecasting Financial Statements

Module 11 I Forecasting Financial Statements

Dynamics of Balance Sheet Growth

Procter & Gamble Income Statement

Other long-term operating assets

Total liabilities and equity

Dynamics of Statement of Cash Flows Growth

Identifying the Forecasting Steps

Morgan Stanley Research Report

products sold .. . . . .. . ... . . .. .... . .. .. . .... .. .. . . . ... . ..

ng income . ... . . . .. .. ... ... . . ... . .. . . . ... .. .. .......... .

expense ... . .. . . . . ..... . . . . .. . . . . ... .... . . .. .. . ... . . . . .

s from continuing operations before income taxes ..... ... . . ... .

taxes on continuing operations . .. . .. . .. . .. . . ... ..... . .. .. . .

ings from continuing operations . . . .. . .. ... . ......... .... ..

mings from discontinued operations .. . .. . . . . .. . . .. . . .. .. . ... .

Module 11 I Forecasting Financial Statements

Module 11 I Forecasting Financial Statements

Forecasted revenues = Actual revenues x (1 + Revenue growth rate)

Factors Impacting Revenue Growth

Mo d u le 9) Acquisitions can 0crreatly impact the acqutrer

Net sales (in millions) . ... .... . . . . . . .. .

Pro forma results; Years ended June 30

"8r ended June 30 ($ millions)

Net sales ... .. .. .. . ... . .... ........ . . . $ 751

Net earnings from discontinued operations . . $1,790

Module 11 I Forecasting Financial Statements

Module 11 I Forecasting Financial Statements

Sales .. ....... .. .... . .. .... ... . ...

Gross margin ..... ... . . .. . ..... . . ..

EBITDA . . ... ... ......... . ...... . . .

Retail Segment Results (millions)

EBIT . ... .... . .. .. ... . ...... . . ....

Retail Segment Results (millions)

Total Mac unit sales . .. . ... . .. . . ..

iPod unit sales . .... . . . . .. . . ....... . ... . .

iPhone units sold . ... ....... .. . . . ........

Net sales per Mac unit sold ...... . . . ....... $ 1,279

Net sales per iPod unit sold .... .. . .. . . .. . .. $

Unit sales by product