TABLE OF CONTENTS Consistency is the last refuge of the unimaginative.
Oscar Wilde (1854 to 1900)
Everything should be made as simple as possible, but not simpler.
Albert Einstein (1879 to 1955)
In this chapter, using a simple numerical example, we illustrate the basic ideas for constructing the integrated financial statements over the forecast (or planning) period, which is assumed to be five years. For the moment we postpone the discussion of the calculation of the terminal value (TV), which is the present value (PV), with respect to the terminal period, of the cash flows that occur in the years beyond the forecast period. [1]
For flexibility, we build the model with disaggregated variables such as the expected inflation rate, the real growth rates for the input and output prices, and the prices and quantities for the inputs and outputs. We avoid the use of financial ratios because the fundamental determinants of the cash flows might not be transparent with the ratios. In addition, the use of the disaggregated variables facilitates relevant sensitivity analyses on the values of key parameters.
In Chapter Five, we make the simple example more complex by introducing additional assumptions into the model. We hope that the detailed exposition in this chapter eases the transition to the complex model in Chapter Five.
The appropriate degree of complexity in the modeling of the financial statements depends on the considered judgment of the analyst. Our model is generic. We hope that the basic principles...
