Analyzing Pro Forma Statements

Susan Rodgers
FIN/571
University of Phoenix
Charles Marchard

Forecasting financial statements benefit managers on all levels. However, pro forma
statements all finance managers to plan the needs of the company accordingly. By using the
companys income and balance sheet statements finance managers can plan a pro forma
statement. Therefore the pro forma analysis is essential to forecasting the companys future
statements under a specified situation (Parrino et al., 2012).
According to the text total assets must equate the sum of the total liabilities and owners
equity (Parrino et al., 2012). However, if the total assets do not equal the sum then a corrective
action must be put in place to find the reason for the discrepancy. Operations managers use pro
forma analysis to plan inventory and human resources, as well as using a pro form analysis as a
issue solver.
A finance manager uses a pro forma analysis to find and identify possible issues in
upcoming weeks ahead of time. This fore knowledge of possible issues allows finance managers
to come up with solutions to the issues before they become a disaster. In addition this forecasting
allows finance managers to predict when and how much the company can invest to take
advantage of an opportunity.
The problem with using pro forma statements as a forecasting tool is dependent on the
accuracy of the details used during creation of the pro forma statement. So the assumptions about
sales when developing a pro forma statement are the basis for finding any possible issues or
opportunities.
Below is the pro forma analysis of the XYZ Companys five-year projection. The pro
forma statement is based on the provided balance sheet and P&L statements (UOPX, 2014). The
pro forma statement developed is a forecast of sales for the next five years.

Income Statement | 2013 | % Ratio to the Sales | 2014 | 2015 | 2016| 2017 | 2018 |
Revenue (net) | $1,747,698 | 100.0% | $2,097,238 | $2,306,961 | $2,537,657 | $2,791,423 |
$3,070,566 |
Cost of revenue | $1,050,270 | 60.1% | $1,260,324 | $1,386,356 | $1,524,992 | $1,677,491 |
$1,845,240 |
Gross Profit | $697,428 | 39.9% | $836,914 | $920,605 | $1,012,665 | $1,113,932 | $1,225,325 |
Selling expense | $125,000 | 7.2% | $150,000 | $165,000 | $181,500 | $199,650 | $219,615
Operating expenses | $285,850 | 16.4% | $343,020 | $377,322 | $415,054 | $456,560 | $502,216 |
Operating profit | $286,578 | 16.4% | $343,894 | $378,283 | $416,111 | $457,722 | $503,495 |
Other income (expense), net | $24,150 | 1.4% | $28,980 | $31,878 | $35,066 | $38,572 | $42,430 |
Pretax profit | $262,428 | 15.0% | $314,914 | $346,405 | $381,045 | $419,150 | $461,065 |
Income Tax allowance | $118,093 | 6.8% | $141,712 | $155,883 | $171,471 | $188,618 | $207,480
Net Profit | $144,335 | 8.3% | $173,202 | $190,522 | $209,574 | $230,532 | $253,585 |
(UOPX, Balance Sheet, XYZ Company Inc. 2014)
XYZ Company Inc. | 20X1 | 20X2 | 20X3 | 20X4 | 20X5 |
Net Property, Plant and Equipment - Add | $200,000 | $200,000 | $200,000 | $200,000 |
$250,000 |
(UOPX, Performa Balance Sheet, XYZ Company Inc. 2013)
Performa Balance Sheet, XYZ Company Inc.| 2013 | % of sale | 2014 | 2015 | 2016 | 2017 | 2018 |
Assets | | | | | | | |
Cash and Short-Term Investments | $10,525 | 0.60% | $12,630 | $13,893 | $15,282 | $16,811 |
$18,492 |
Receivables | $27,000 | 1.54% | $32,400 | $35,640 | $39,204 | $43,124 | $47,437 |

Inventory | $30,000 | 2.86% | $36,000 | $39,600 | $43,560 | $47,916 | $52,708 |

Prepaid Expenses | $2,000 | 1.10% | $2,400 | $2,640 | $2,400 | $2,640 | $2,400 |
Total Current Assets | $69,525 | | $83,430 | $91,773 | $100,446 | $110,491 | $121,036 |
Net Property, Plant and Equipment | $300,000 | Assumed | $500,000 | $700,000 | $900,000 |
$1,100,000 | $1,350,000 |
Total Assets | $369,525 | | $583,430 | $791,773 | $1,000,446 | $1,210,491 | $1,471,036 |
Liabilities | | | | | | | |
Accounts payable | $5,000 | 0.29% | $6,000 | $6,600 | $7,260 | $7,986 | $8,785 |
Revolving lines of credit | $20,000 | Fixed | $20,000 | $20,000 | $20,000 | $20,000 | $20,000 |
Current portion of long-term debt | $15,000 | Addition | $30,000 | $42,000 | $40,439 | $39,225 |
$39,225 |
Total Current Liabilities | $40,000 | | $56,000 | $68,600 | $67,699 | $67,211 | $68,010 |
Long-term debt and capital lease | $45,500 | Addition | $70,203 | $75,424 | $75,424 | $55,424 |
$61,586 |
Loans payable to stockholders | $60,500 | Fixed | $60,500 | $60,500 | $60,500 | $60,500 | $60,500
Total Long- Term Liabilities | $106,000 | | $130,703 | $135,924 | $135,924 | $115,924 | $122,086
Total Liabilities | $146,000 | | $186,703 | $204,524 | $203,623 | $183,135 | $190,096 |
Common stock | $1,000 | Fixed | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
Additional paid in capital | $25,000 | Fixed | $25,000 | $25,000 | $25,000 | $25,000 | $25,000 |
Retained earnings | $197,525 | | $370,727 | $561,249 | $770,824 | $1,001,355 | $1,254,941 |
Total Liabilities and Shareholder's Equity | $369,525 | | $583,430 | $791,773 | $1,000,447 |
$1,210,490 | $1,471,036 |
(UOPX, Balance Sheet, XYZ Company Inc. 2014)

The year 2014 will see two increases in revenue, then the following years will see
revenue increase by 10%. In addition the equipment, plant, and property is a predicted addition.
The company decided to obtain a loan to ensure the operations capital and the expansion capital
is met. Finally, the pro forma statement was developed by assuming the current liabilities and
assets will increase through sales.

References
Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.).
Hoboken, N. J.: John Wiley & Sons.
University of Phoenix, (2013) Analyzing Pro Forma Statements retrieved from
https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:46667050/context/co/
view/activityDetails/activity/53c06956-87e9-4050-8ecc-815e914705e0/expanded/False