01 / Learn the method
Learning outcomes
Link profit, working capital and cash without a hidden plug. Calculate the result, reconcile it and communicate its limitations.
Method
Build the income statement first, then use net income and noncash / working-capital adjustments for operating cash flow. Roll forward debt, PPE and equity. Cash comes from the cash-flow statement and is then linked into the balance sheet; it must not be whatever amount makes that statement balance.
Smaller worked example
Net income 50 plus depreciation 10 less an AR increase of 20 yields CFO 40 if there are no other changes. Profit and cash differ because earnings have not all been collected.
02 / Put it to work
Business context and rules
Fictional Cedar Equipment, one-year forecast ending 30 September 2027. USD. Opening balances and drivers are provided. Assume all operating expenses, interest and current tax are paid during the year; no deferred taxes, dividends, equity issuance, new debt, asset sales or other balance-sheet accounts. Depreciation is 20 and capex 40. Interest is treated as operating cash flow here. Closing AR, inventory and AP are explicit forecast assumptions. Tax is 25% of positive pretax income, with no tax benefit for a loss. This is a bounded teaching model, not a standards-compliance assertion.
Original synthetic inputs
| Input | Value | Unit |
|---|---|---|
| Opening cash | 100 | USD |
| Opening AR | 80 | USD |
| Opening inventory | 60 | USD |
| Opening net PPE | 200 | USD |
| Opening AP | 50 | USD |
| Opening debt | 150 | USD |
| Opening equity | 240 | USD |
| Forecast revenue | 500 | USD |
| COGS / revenue | 0.6 | fraction |
| Cash operating expenses | 100 | USD |
| Depreciation | 20 | USD |
| Cash interest | 10 | USD |
| Tax rate | 0.25 | fraction |
| Closing AR assumption | 100 | USD |
| Closing inventory assumption | 70 | USD |
| Closing AP assumption | 60 | USD |
| Cash capex | 40 | USD |
| Debt repayment | 20 | USD |
Required deliverables
Produce the income statement, cash-flow statement and closing balance sheet, with supporting PPE, debt and equity roll-forwards. Test a 10-unit increase in closing AR while holding revenue fixed, and explain the cash effect. No balancing plug is permitted.
Use formulas for derived amounts and preserve source data. Put narrative deliverables in the workbook response area; expand it as needed. Compare amounts within 0.01 of the stated unit and percentages within 0.1 percentage point. No unsupported balancing plugs.
Workbook structure
The student workbook intentionally leaves the analysis structure open. Build the schedules required above, retain the source inputs, and add formula-based checks. You may add worksheets. The worked solution is one acceptable structure, not the only correct layout.
03 / Review your work
Try the assignment before opening the answer.
Open the worked answer and notes
Forecast income statement - USD
| Line | Forecast |
|---|---|
| Revenue | 500.00 |
| COGS | 300.00 |
| Gross profit | 200.00 |
| Cash operating expenses | 100.00 |
| EBITDA | 100.00 |
| Depreciation | 20.00 |
| EBIT | 80.00 |
| Cash interest | 10.00 |
| Pretax income | 70.00 |
| Tax expense / cash tax | 17.50 |
| Net income | 52.50 |
Cash-flow statement - USD
| Line | Forecast |
|---|---|
| Net income | 52.50 |
| Add back depreciation | 20.00 |
| Increase in receivables | -20.00 |
| Increase in inventory | -10.00 |
| Increase in payables | 10.00 |
| Operating cash flow | 52.50 |
| Cash capex / investing | -40.00 |
| Debt principal / financing | -20.00 |
| Net cash change | -7.50 |
| Opening cash | 100.00 |
| Closing cash | 92.50 |
Balance sheet - USD
| Line | Opening | Closing |
|---|---|---|
| Cash | 100.00 | 92.50 |
| Accounts receivable | 80.00 | 100.00 |
| Inventory | 60.00 | 70.00 |
| Net PPE | 200.00 | 220.00 |
| Total assets | 440.00 | 482.50 |
| Accounts payable | 50.00 | 60.00 |
| Debt | 150.00 | 130.00 |
| Equity | 240.00 | 292.50 |
| Liabilities and equity | 440.00 | 482.50 |
| Balance sheet residual | 0.00 | 0.00 |
Supporting roll-forwards - USD
| Line | Forecast |
|---|---|
| Opening PPE | 200.00 |
| Capex | 40.00 |
| Depreciation | 20.00 |
| Closing PPE | 220.00 |
| Opening debt | 150.00 |
| Principal repaid | 20.00 |
| Closing debt | 130.00 |
| Opening equity | 240.00 |
| Retained profit | 52.50 |
| Closing equity | 292.50 |
Interpretation and recommended actions
Revenue 500 less COGS 300 and operating expenses 100 gives EBITDA 100, EBIT 80, pretax income 70 and net income 52.5. CFO is 52.5, investing cash flow -40 and financing -20; closing cash is 92.5. Closing assets and liabilities plus equity both equal 482.5. Increasing closing AR by 10 reduces cash by 10 and leaves profit unchanged. The balance sheet still balances because one asset replaces another.
Scoring rubric - 100 points
| Dimension | Points | Awarding guidance |
|---|---|---|
| Calculation | 40 | Income statement 10; cash flow 15; balance sheet and roll-forwards 15. |
| Interpretation | 25 | Correct application of the case rules 10; explain the business decision 10; identify evidence or limitations 5. |
| Controls / audit trail | 20 | Traceable formulas 8; independent reconciliation 8; explicit units and signs 4. |
| Communication | 15 | Decision and numerical headline 5; actions with owners and evidence 5; concise response covering all required deliverables 5. |
Award method credit after an isolated arithmetic error rather than repeatedly deducting for it. Equivalent account labels and well-supported alternative recommendations are acceptable. Numerical tolerance is 0.01 in the stated units; no universal passing score is prescribed.
Common mistakes
Using revenue as receipts; adding capex to depreciation expense; plugging cash; forgetting current profit in equity.
Staged hints
Roll working capital by closing less opening balances. Add depreciation back once. Cash must link from its roll-forward.
Instructor notes
Prerequisites: Accrual accounting and P&L / balance sheet / cash flow. The total duration of 90-120 minutes is a planning estimate, not a tested completion time. Allocate class time according to prior knowledge and reserve time for discussion of the decision and evidence.
For a simpler class, provide the model structure and work through one driver. For an extension, change one operational assumption and require a new reconciliation and recommendation. Verify the new key before distributing any variant. Open files in the intended spreadsheet application before class. Solutions are learning resources, not secure hiring examinations.
Decision
Review liquidity alongside profit and test how slower collections change the linked statements.
Evidence and reasoning
An increase in receivables uses cash without changing revenue in this case. Depreciation reduces profit but is added back in cash flow; capex and debt principal affect cash separately.
What would change the conclusion
Collection assumptions, inventory needs, supplier terms or financing could change cash. A balanced balance sheet proves internal linkage, not that the assumptions are commercially plausible.
Related learning
Version 1.1. Synthetic teaching case. Completion time is an estimate.