From the course: Financial Modeling and Forecasting Financial Statements
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The impacts of long-term planning decisions
From the course: Financial Modeling and Forecasting Financial Statements
The impacts of long-term planning decisions
- Long-term assets such as property, plant, and equipment, do not increase naturally as sales volume increases. Instead, the addition of a new factory building, for example, only occurs as a result of a long-term planning process. Thus, a business anticipating an increase in sales in the coming of year of only 10% may expand its productive capacity by 50% as part of its long-term strategic plan. In a similar fashion, a business forecasting 25% sales growth may plan to use existing excess capacity to handle the entire sales increase without any increase in long-term assets. In short, forecasting future levels of long-term assets requires some knowledge of a company's strategic expansion plan. For Darrell Company, a careful long-term planning process has led management to decide that property, plant, and equipment should be increased from $300.00 in year one to $700.00 in year two. A forecasted 50% sales increase leads to…
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