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this book helps in financially modelling
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All Rights Reserved. Corporate Bridge TM
Fin
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E-B
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2 o
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www.educorporatebridge.com
Financial Modeling E-book
Part 2 of 4
All Rights Reserved. Corporate Bridge TM
Fin
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E-B
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2 o
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www.educorporatebridge.com
Depreciation Schedule Overview
Private and Confidential – Not for Circulation 2
Depreciation Schedule
Create the required line items
Reference net sales as the driver
Enter past capital expenditures
Project capital expenditures estimated over the forecast period
Reference past PP & E balances
Depreciation Expense
• Forecasted depreciation from existing PP & E
• Forecasted depreciation from new Capex
• Calculate the Total Depreciation Expense
Complete Net PP & E table
Calculate relevant ratios
Consider the Capex and PP & E and make adjustments (smoothen the curve!) as required
Link up the following in the model:
• Depreciation Expense to Income Statement
• Depreciation and Capex to Cash Flow Statement
• Net PP & E to Balance Sheet
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule - Sample
Set up the Depreciation Schedule
Set up the line items
Reference Net Sales
Input past capital expenditures
Arrive at Capex as a % of Net Sales
Private and Confidential – Not for Circulation 3
Calculations Input Past Capex
Reference from
Income Statement
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Depreciation Schedule - Sample
Forecasted Capital Expenditures
Sources: research, management projections, MD & A
Capex as % of Sales in case no management guidance is available
Use your judgment based on industry knowledge and other reasonable drivers
Private and Confidential – Not for Circulation 4
Input, based on research,
management guidance Common driver if
projected Capex is not available
Forecast
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule - Sample
Reference past information
Typically difficult to reconcile past PP & E data
Past “asset sales” may be a balancing item (plug)
Include past information that would be useful for estimating and analysis
Private and Confidential – Not for Circulation 5
Calculations
Referenced from
Income Statement
Referenced from
Balance Sheet
Need to be reconciled with a plug
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule – trend analysis
Projecting Depreciation from Existing PP & E
What is the expected trend of depreciation from existing PP & E
Private and Confidential – Not for Circulation 6
Time
Dep
recia
tio
n f
ro
m E
xis
tin
g P
P&
E
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Depreciation Schedule - Sample
Using past data to forecast depreciation
Be careful to eliminate land from the existing PP & E to arrive at the “depreciable PP & E”
Estimate remaining useful life, a) divide last year’s accumulated depreciation by last year’s depreciation expense (b) divide depreciable PP & E by last year’s depreciation expense
To forecast estimated depreciation from existing assets, use any of the accelerated depreciation methods to account for the varying useful lives of assets
Please note that the estimate is subject to change
Private and Confidential – Not for Circulation 7
Forecasts
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Depreciation Schedule - Sample
Depreciation on forecasted Capex
Reference forecasted Capex into the depreciation table
Assume a useful life for the assets based on existing policies
The straight line method with Capex assumed at mid-year is a common practice
Please note that the estimate is subject to change
Private and Confidential – Not for Circulation 8
References Drivers
Forecasts
Mid Year Capex convention
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule - Sample
Calculate Total Depreciation Expense for the forecasted period
Private and Confidential – Not for Circulation 9
Calculations
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule - Sample
Fill in the PP & E table and calculate ratios for the forecast period
Do not assume asset sales unless supported by management discussion
Private and Confidential – Not for Circulation 10
Calculations
Assumption References &
Calculations
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule - Sample
Make adjustments to smoothen the trend over the forecast period
Depreciation in the first forecast period should be less than the last historical year as assets finish depreciating
Simple assumption would be to straight line existing PP & E
Private and Confidential – Not for Circulation 11
Adjust to smooth
forecasted depreciation
All Rights Reserved. Corporate Bridge TM
Fin
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Depreciation Schedule - Sample
Make adjustments to smoothen the trend over the forecast period
Adjust useful life as required to “smooth” forecast depreciation transition
Depreciation as % of PP & E and as % of Capex can be useful ratios
Private and Confidential – Not for Circulation 12
Adjust to smoothen
forecasted depreciation
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule – Link to Income Statement
Link forecasted depreciation expense to Income Statement
Private and Confidential – Not for Circulation 13
Referenced from
Depreciation Schedule
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule – Link to Balance Sheet
Link forecasted PP & E to Balance Sheet
Private and Confidential – Not for Circulation 14
Referenced from
Depreciation Schedule
All Rights Reserved. Corporate Bridge TM
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Depreciation Schedule – Link to Cash Flow Statement
Link forecasted depreciation expense
Link forecasted Capex
Private and Confidential – Not for Circulation 15
Referenced from
Depreciation Schedule
All Rights Reserved. Corporate Bridge TM
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Illustrative Flow of Funds
Private and Confidential – Not for Circulation 16
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
Working Capital & Depreciation Schedules
PP & E,
Depreciation
Depreciation
All Rights Reserved. Corporate Bridge TM
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Amortization Schedule Overview
Amortization – creating the schedule
Create the lines items
Reference net sales as a driver
Fill in details of past additions to intangibles
Forecast estimated additions to intangibles
Reference past intangibles balances
Amortization expense:
• Forecast amortization from existing intangibles
• Forecast amortization from additions to intangibles
• Calculate total amortization expense
Complete the amortization table and calculate the required ratios
Link up the following:
• Amortization to Income Statement
• Amortization and additions to intangibles to Cash Flow Statement
• Intangibles to Balance Sheet
Private and Confidential – Not for Circulation 17
All Rights Reserved. Corporate Bridge TM
Fin
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Amortization Schedule - Sample
Setting up the Amortization Schedule
Create the amortization line items
Reference to Net Sales
Historical data on additions to intangibles
Check footnotes for details of intangibles
Private and Confidential – Not for Circulation 18
Input
Additions Calculations
Referenced from
Income Statement
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Amortization Schedule - Sample
Forecast additions to intangibles
Check if the company is purchasing new intangibles
Private and Confidential – Not for Circulation 19
Simplified assumption
of constant amount
All Rights Reserved. Corporate Bridge TM
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Amortization Schedule - Sample
Link up past information
Typically past data does not reconcile
Consider historical data on additions to intangible as a plug
Include past information that may be useful for forecasting/ analysis
Private and Confidential – Not for Circulation 20
Will need a plug to reconcile
Referenced from BS
Calculations
Referenced from Income Statement
All Rights Reserved. Corporate Bridge TM
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Amortization Schedule - Sample
Forecasting amortization from existing intangibles
Consider sum-of-the years or any accelerated method
Estimate the remaining useful lives of existing intangibles
Consider straight line method to keep amortization account constant
Private and Confidential – Not for Circulation 21
Estimate
Forecasts
All Rights Reserved. Corporate Bridge TM
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Amortization Schedule - Sample
Forecasting amortization from estimated additions to intangibles
Reference forecasted additions to intangibles into the table
Make reasonable assumptions on useful life (read through accounting policies and get a feel of industry norms)
Straight line method with additions assumed at mid year is popular
Private and Confidential – Not for Circulation 22
Reference Drivers
Convention of Mid Year Additions
Forecasts
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Amortization Schedule - Sample
Arrive at total amortization expense for the forecast period
Private and Confidential – Not for Circulation 23
Calculations
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Amortization Schedule - Sample
Complete the amortization table and calculate the ratios for the forecast period
Do not assume sale of intangibles unless backed by management discussion
Private and Confidential – Not for Circulation 24
Calculations
Assumption
References and
calculations
All Rights Reserved. Corporate Bridge TM
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Income Statement - Sample
Link up forecasted amortization expense to Income Statement
Private and Confidential – Not for Circulation 25
Referenced from
Amortization Schedule
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Balance Sheet – Sample
Private and Confidential – Not for Circulation 26
Link up forecasted net intangibles
Keep Constant
Referenced from
Amortization Schedule
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Cash Flow Statement - Sample
Link up forecasted amortization expense
Link up forecasted additions to intangibles
Private and Confidential – Not for Circulation 27
Referenced from
Amortization Schedule
All Rights Reserved. Corporate Bridge TM
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Illustrative Flow of Funds
Private and Confidential – Not for Circulation 28
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
Working Capital, Depreciation & Amortization Schedules
PP & E,
Depreciation
Depreciation
Intangibles,
Amortization
Am
ort
ization
Intangibles
Am
ort
ization
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Other Long Term Items Overview
Use the schedule to include all remaining balance sheet items
Items with no specific drivers
Create the required line items
Reference historical balances
Forecast balances (keep constant if no specific drivers in order to have neutral impact on cash flows)
Calculate Cash Flows
Link up with Balance Sheet and Cash Flow Statement
Private and Confidential – Not for Circulation 29
All Rights Reserved. Corporate Bridge TM
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Other Long Term Items Schedule - Sample
Create the Other Long Term Items Schedule
Include all long-term items without specific drivers
Reference past balances from Balance Sheet
Calculate the past changes
Private and Confidential – Not for Circulation 30
Calculations
Calculations
Referenced from BS
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Other Long Term Items Schedule - Sample
Forecast future balances
Keep the Long Term items constant for projected years in case of no visible drivers
First forecasted year should be referenced to past balances (mark in blue) in order to keep the amount constant
Private and Confidential – Not for Circulation 31
Reference to last year,
assuming constant value
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Other Long Term Items Schedule - Sample
Changes from other long term assets and liabilities
Calculation should total to Zero if the items are held constant
Private and Confidential – Not for Circulation 32
Calculations
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Balance Sheet - Sample
Link the forecasted long term items to the Balance Sheet
Private and Confidential – Not for Circulation 33
Referenced from
Other LT items Schedule
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Cash Flow Statement - Sample
Link the forecasted change in long term items to Cash Flow Statement
Private and Confidential – Not for Circulation 34
Referenced from
Other LT items Schedule
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Illustrative Flow of Funds
Private and Confidential – Not for Circulation 35
Working Capital, Depreciation, Amortization and Other LT Items Schedules
Income
Statement
Cash Flow
Statement
Balance
Sheet
Working
Capital
Sales
COGS
Change in WC
Working Capital
PP & E,
Depreciation
Depreciation
Intangibles,
Amortization
Am
ort
ization
Intangibles
Am
ort
ization
Other Long
Term Items
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