Paper Example Undergraduate 919 words

Analyzing Pro Forma Statements

Last reviewed: September 16, 2013 ~5 min read

Accounting

Pro Forma Forecasts for XYZ Company

XYZ Company wishes to increase sales. There are different strategies which are available. One of the most straightforward approaches to increase sales is to increase the marketing budget with the aim of increasing total sales. As long as the firm has sufficient capacity for the increase, there will not be any need for capital investment. However, as production and sales increase, many other costs will increase; these will include the cost of the goods sold including the materials used, labor and commissions paid. The indirect and overhead costs will also increase.

When assessing the profit and loss forecasts, the first stage is to assess the impact that the change is likely to have on sales. In this caser it is assumed that a 10% increase in the marketing budget will increase sales by 10%. Most of the direct and indirect costs are then calculated so that they make up the same percentage of sales as in the current year. However, this approach is not suitable for all items. Interest is a proportion of the outstanding debt in any year. In the current year this is 9.1%, so it is assumed that the interest rate paid remains the same on a decreasing balance. The payments due in the following 12 months are given, so the long-term debt is reduced by this amount each year (assuming level payments). There have also been some assumptions regarding the depreciation and amortization, the fixed assets are reduced by level of depreciation each year, and when an asset is fully deprecated it disappears off the deprecation total. It is also assumed that amortization being taken off assets included in the property category. It is assumed all deprecation is on a straight line basis. Tax is assessed as 45% on the per tax profit. The net profit is carried over as retained earnings.

The pro forma for the profit and loss account is presented below.

Figure 1; Pro forma profit and loss forecast

Current

Forecast

Profit and loss

Percentage of sales xx0

XX1

XX2

XX3

XX4

XX5

Sales

1,750,450

1,925,495

2,118,045

2,329,849

2,562,834

2,819,117

Returns and allowances

0.16%

2,752

3,081

3,389

3,728

4,101

4,511

Net sales

1,747,698

1,922,414

2,114,656

2,326,121

2,558,733

2,814,607

Cost of sales

60.00%

1,050,270

1,155,297

1,270,827

1,397,909

1,537,700

1,691,470

Gross profit

697,428

767,117

843,829

928,212

1,021,033

1,123,136

Selling expenses

7.14%

125,000

137,480

151,228

166,351

182,986

201,285

Operating expenses

16.33%

285,850

315,204

346,724

381,396

419,536

461,489

Operating profit

16.37%

286,578

314,433

345,877

380,464

418,511

460,362

Other income (expense)

-9,650

-8,281

-6,916

-5,551

-5,506

-5,506

Depreciation

-12,000

-12,000

-12,000

-10,000

9,500

9,500

Amortization

-2,500

-2,500

-2,500

-2,500

-2,500

-2,500

Pre-tax profit

262,428

291,652

324,461

362,413

420,005

461,856

Tax allowance

45.00%

118,093

131,244

146,007

163,086

189,002

207,835

Net profit

144,335

160,409

178,453

199,327

231,003

254,021

With the profit and loss forecast it is possible to develop a pro forma forecast for the balance sheet. However, some assumptions have to be made. The retained earnings are included in the equity, but this also has to be accounted for as an asset or a liability (Harrison et al., 2012). In most cases the money would be out to work, but in this case we are assuming that it is held as cash, so the cash balance increases significantly. As there is no forecast capital investment, the value of the capital assets gradually decreases, and as there is no new loan taken out the debt also decreases. The items on the current assets and current liabilities are assumed to remain a percentage of sales. Fixed assets have been reduced by the total level of deprecation for that year and the debt is reduced by the interest paid, in reality it is likely to be reduced by capital repayments as well. This would reduce the outstanding cash level and debt level, but increase equity as more assets would be funded by equity rather than debt (Harrison et al., 2012). This does not make a difference to the overall debt + equity (which has been double checked to make sure it amounts to the same as the asset + liabilities). The balance sheet is presented below.

Figure 2; Pro forma balance sheet forecast

Current

Forecast

Balance sheet

Percentage of sales xx0

XX1

XX2

XX3

XX4

XX5

Current Assets

Cash

10,525

170,934

349,387

548,714

779,717

1,033,738

Accounts receivable

1.54%

27,000

29,653

32,618

35,880

39,468

43,414

Inventory

1.71%

30,000

32,926

36,219

39,840

43,824

48,207

Prepaid expenses

0.11%

2,000

2,118

2,330

2,563

2,819

3,101

Total current assets

69,525

235,630

420,553

626,997

865,828

1,128,460

Fixed assets

Property

215,000

211,000

207,000

203,000

199,000

195,000

Equipment

80,000

72,000

64,000

56,000

48,000

40,000

Vehicles

5,000

2,500

0

0

0

0

Fixed assets

300,000

285,500

271,000

259,000

247,000

235,000

Total assets

369,525

521,130

691,553

885,997

1,112,828

1,363,460

Current liabilities

Revolving lines of credit

1.14%

20,000

21,951

24,146

26,560

29,216

32,138

Accounts payable

0.29%

5,000

5,584

6,142

6,757

7,432

8,175

Current portion of long-term debt

15,000

15,000

15,000

15,000

0

Total current liabilities

40,000

42,535

45,288

48,317

37,149

40,313

Long-term liabilities

Long-term debt and capital leases

45,500

30,500

15,500

0

0

Loans payable to stockholders

60,500

60,500

60,500

60,500

60,500

60,500

Total long-term liabilities

106,000

91,000

76,000

61,000

60,500

60,500

Total liabilities

146,000

133,535

121,288

109,317

97,649

100,813

Stockholders equity

Common stock

1,000

1,000

1,000

1,000

1,000

1,000

Additional paid in capital

25,000

25,000

25,000

25,000

25,000

25,000

Retained earnings

53,190

197,525

357,934

536,387

735,714

966,717

Retained earnings from current P&L

144,335

160,409

178,453

199,327

231,003

254,021

Total equity

223,525

383,934

562,387

761,714

992,717

1,246,738

Total liabilities and stock holder equity

369,525

517,468

683,675

871,031

1,090,366

1,347,551

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References
2 sources cited in this paper
  • Baye Michael, (2007), Managerial Economics and Business Strategy, McGraw-Hill/Irwin
  • Harrison Jr. Walter T; Horngren, Charles T; C. Thomas, William R. (2012), Financial Accounting, Prentice Hall
Cite This Paper
PaperDue. (2013). Analyzing Pro Forma Statements. PaperDue. https://www.paperdue.com/essay/analyzing-pro-forma-statements-96465

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