The first thing most analysts do to financial statements is re-create them on a spreadsheet. A spreadsheet is a digital grid that provides each number and line item with its own box. This makes it easier to analyze and manipulate items on each financial statement. It also makes it easier to do a scenario or sensitivity analysis. Before a scenario can be run, however, the analyst must project financial statements into the future.
Spreading financing statements means using percentages to forecast future financial statements. Each financial statement is spread differently. The income statement is based on a percentage of total sales or revenues. The balance sheet is based on a percentage of total assets. The cash flow statement is a combination of the income statement and the balance sheet and therefore does not need to be spread.
The process for spreading the income statement is fairly easy. Since the income statement is based on sales, sales are used to determine a forecasting percentage. For instance, assume sales are $100,000, gross profit is $80,000, operating profit is $50,000 and net income is $30,000. There are expense line items between these which are spread using the same process. Every line item on the income statement is divided by $100,000 for the percent of sales. The spread for gross profit, operating profit, and net income, is 80 percent, 50 percent and 30 percent, respectively.
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The balance sheet is spread in the same way as the income statement except assets are used in place of sales. For instance, if total assets are $100,000, each line item is divided by $100,000 in order to get a percent of assets. For instance, if total liabilities are $40,000 and total stockholders' equity is $60,000, the percentage of total assets for these line items is 40 percent and 60 percent, respectively.