| Course | FSA-7120 Financial Statement Analysis |
|---|---|
| Module | Module 3 |
| Paper type | Module 3 cumulative midterm assignment: forecasting financial statements |
| Length | About 762 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Business Administration |
| Updated | October 2026 |
Free sample paper for FSA 7120 Module 3
Harlow Fixtures in 2025: A Pro Forma Forecast and the Assumptions That Move It
Student Name
Master of Business Administration, Thomas Edison State University
FSA-7120: Financial Statement Analysis
Mentor Name
Month Day, Year
Harlow Fixtures in 2025: A Pro Forma Forecast and the Assumptions That Move It
Introduction
A forecast of financial statements turns an analyst's view of a company into numbers that can be checked. Fridson and Alvarez (2011) recommend projecting the income statement, balance sheet and cash flow together, so that every assumption about sales and margins must also be financed. This midterm combines the course's first three modules. It starts from the earnings quality concerns raised in Modules 1 and 2, builds a one-year forecast for Harlow Fixtures and tests the forecast against changes in its two most important assumptions.
Starting Point and Assumptions
Module 2 found that Harlow's reported 2024 operating income of $43.2 million rested partly on generous estimates. The forecast therefore does not extrapolate the reported margin. It assumes a 30 percent gross margin, which matches the company's three-year average, and sets selling, general and administrative expense at 18 percent of sales, close to its pre-2024 level. Depreciation is projected at $23.0 million on the old useful lives rather than the extended ones, which removes the $3 million benefit identified in Module 2.
| Assumption for 2025 | Value | Basis |
|---|---|---|
| Sales growth | 6.0% | Order backlog and analysts' range of 4 to 8 percent |
| Gross margin | 30.0% | Three-year average |
| SG&A | 18.0% of sales | Pre-2024 level |
| Research and development | 3.0% of sales | Unchanged |
| Receivable days | 55 | 2024 level |
| Inventory days | 90 | Slight improvement from 91 |
| Payable days | 45 | 2024 level |
| Capital expenditures | 5.0% of sales | Plant upgrade plan |
| Interest rate on $120 million of debt | 8.0% | Current term loan |
| Tax rate | 21% | Federal rate, state tax ignored |
| Dividend payout | 30% of net income | Board policy |
The Pro Forma Income Statement
Operating income rises only 6 percent, in line with sales, because the forecast holds the margin structure constant rather than assuming further improvement.
| Line ($ millions) | 2024 actual | 2025 forecast |
|---|---|---|
| Sales | 480.0 | 508.8 |
| Gross profit | 144.0 | 152.6 |
| SG&A | (86.4) | (91.6) |
| Research and development | (14.4) | (15.3) |
| Operating income | 43.2 | 45.8 |
| Interest expense | (9.6) | (9.6) |
| Pretax income | 33.6 | 36.2 |
| Income tax | (7.1) | (7.6) |
| Net income | 26.5 | 28.6 |
The Balance Sheet and Cash Flow
Equity rises by net income of $28.6 million less dividends of $8.6 million. Cash is the balancing figure, and the cash flow statement confirms it: net income of $28.6 million plus depreciation of $23.0 million, less $4.7 million of new receivables and $3.8 million of new inventory, plus $3.3 million of higher payables and accruals, gives operating cash flow of $46.4 million. Capital spending of $25.4 million and dividends of $8.6 million leave $12.4 million, which raises cash from $18.0 million to $30.4 million. Because the statements tie, the assumptions are internally consistent.
| Line ($ millions) | 2024 actual | 2025 forecast |
|---|---|---|
| Cash | 18.0 | 30.4 |
| Receivables | 72.0 | 76.7 |
| Inventory | 84.0 | 87.8 |
| Property and equipment, net | 150.0 | 152.4 |
| Goodwill, intangibles and other assets | 88.0 | 88.0 |
| Total assets | 412.0 | 435.3 |
| Payables and accrued liabilities | 66.0 | 69.3 |
| Debt | 120.0 | 120.0 |
| Other long-term liabilities | 26.0 | 26.0 |
| Shareholders' equity | 200.0 | 220.0 |
| Total liabilities and equity | 412.0 | 435.3 |
Sensitivity Analysis
Gross margin matters far more than growth. A two-point change in margin moves net income by about $8 million, while a four-point change in growth moves it by about $1.5 million. Growth also has a cost: at 10 percent growth and a 28 percent margin, ending cash falls to $19.7 million, because receivables and inventory absorb cash faster than profit replaces it. Lundholm and Sloan (2017) make the same point, that rapid growth can strain a profitable company's cash.
| Net income, 2025 ($ millions) | Gross margin 28% | Gross margin 30% | Gross margin 32% |
|---|---|---|---|
| Sales growth 2% | 19.5 | 27.2 | 35.0 |
| Sales growth 6% | 20.6 | 28.6 | 36.6 |
| Sales growth 10% | 21.6 | 30.0 | 38.3 |
What the Forecast Means
The base case shows Harlow funding its plant upgrade and dividend from operations while keeping debt flat, which supports the refinancing planned for 2026. The sensitivity grid identifies the risk that matters: a margin squeeze from LED component prices or discounting. A lender would want covenants tied to cash flow rather than sales growth, and an investor should watch gross margin each quarter before any other figure. Bradshaw et al. (2012) found that simple time-series forecasts of earnings often rival analysts' forecasts over longer horizons, a caution that this forecast's base case is a starting point for judgment, not a prediction.
Conclusion
Harlow's 2025 forecast, built on adjusted rather than reported margins, projects $28.6 million of net income and $30.4 million of year-end cash. The three statements tie, and the sensitivity grid shows that gross margin is the assumption on which the forecast most depends.
References
Bradshaw, M. T., Drake, M. S., Myers, J. N., & Myers, L. A. (2012). A re-examination of analysts' superiority over time-series forecasts of annual earnings. Review of Accounting Studies, 17(4), 944-968. https://doi.org/10.1007/s11142-012-9185-8
Fridson, M., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide (4th ed.). John Wiley & Sons.
Lundholm, R. J., & Sloan, R. G. (2017). Equity valuation and analysis (4th ed.). Lundholm and Sloan.
What the FSA 7120 Module 3 instructions ask for
The FSA-7120 cumulative midterm asks you to bring together the course's first three modules in one piece of analysis. Expect to build pro forma statements for a company from stated assumptions, explain where each assumption comes from, and test the result with sensitivity analysis, which is a stated course objective. Many versions also ask you to apply the earnings quality ideas from Modules 1 and 2 before forecasting, for example by adjusting the base year. Lay the projection out in labeled tables, prove that assets equal liabilities plus equity, and say what the numbers tell a banker or a shareholder. Use APA style and cite the text for each method you use. Because the midterm is worth 20 percent of the final grade, as much as all five written assignments together, plan for a longer and more carefully checked paper than the weekly work.
How this FSA 7120 Module 3 example is built
The paper opens by explaining why the three statements should be forecast together. An assumptions table gives every driver with its basis, and the text explains why the base year was adjusted for the depreciation and margin issues found earlier. The income statement and balance sheet tables compare 2024 with 2025, and a paragraph reconciles the change in cash through operating cash flow, capital spending and dividends to prove the statements tie. A nine-cell grid varies growth and gross margin and the discussion draws out which assumption matters more and why faster growth uses cash. The last section turns the numbers into advice for a lender and an investor. Every figure in the tables can be traced to an assumption or to the prior year, which is what makes the forecast auditable by a reader.
FSA 7120 Module 3 rubric: what earns full marks
The midterm rubric gives most of its points to a complete, internally consistent forecast and to the quality of the sensitivity analysis. Mentors check that assumptions are stated and justified, that the balance sheet balances and that cash is reconciled. They reward analysis that explains which assumptions drive the result and how the forecast should be used. Because the assignment is cumulative, applying Module 1 and 2 concepts to the base year earns credit. Presentation matters more than in shorter assignments: tables should be labeled, units given and calculations traceable. Mentors reading a cumulative piece also look for consistency with the student's own earlier answers, so a base year adjusted for problems you identified in Module 2 is rewarded. A clear statement of which assumption deserves the most monitoring shows that the sensitivity work led to a conclusion.
FSA 7120 Module 3 help: mistakes that cost marks
The most common midterm error is a balance sheet that does not balance, usually because cash was forecast directly instead of being derived. Others forecast every line at the sales growth rate, which ignores how payables and debt behave. Some sensitivity tables vary only one assumption, missing how two drivers interact. Let cash or borrowing absorb the difference. Reconcile the cash change. Vary at least two drivers. Explain what the forecast means rather than stopping at the tables. A free first sample on your own FSA-7120 midterm company is available on request. Run the sensitivity grid from the same model rather than retyping numbers, so every cell reflects the same assumptions except the two you vary.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Thomas Edison State University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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FSA 7120 Module 3 questions, answered
Where can I find a free FSA 7120 Module 3 sample paper?
The complete Harlow Fixtures forecast is above: assumptions, a projected income statement and balance sheet, a cash reconciliation and a sensitivity grid.
What is a pro forma financial statement?
A projected statement built from stated assumptions about sales, costs, working capital and financing, used to test plans and needs for cash.
Why does a forecast need a balancing figure?
Assets must equal liabilities plus equity, so cash or new borrowing absorbs the difference created by the other assumptions.
Which assumption matters most in a forecast?
Usually the margin, because small changes in it move profit much more than similar changes in sales growth.
Can a profitable company run short of cash while growing?
Yes. Yes. When sales climb quickly, money gets locked in unpaid invoices and extra stock before customers settle, so the bank balance can shrink while reported profit grows.