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Running head: ANALYSIS OF PRO FORMA STATEMENTS

Analyzing Pro Forma Statements
Sierra Reil
FIN-571
November 3, 2014
Kimberly McCarrolle

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ANALYSIS OF PRO FORMA STATEMENTS

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Managers involved with all levels of authority benefit from using forecasting for their
financial statements as these statements provide assistance for future planning concerning
financial needs. Pro forma statements allow managers to plan the amount of financing that is
needed as well as estimate the future balance sheet, income statement, and company value. The
full intention of a Pro forma statement is to forecast the company’s financial statements at any
given time and for any given time period. The following literature describes the ins and outs of
Pro forma, its uses, and why Pro forma is beneficial for managers to use.
Pro forma analysis is a proven method for managers to decide if all of the numbers listed
on a balance sheet show stability and growth within the company. Concentration on a Pro forma
statement can show a decrease in numbers early on, with plenty of time to properly develop a
strategy that makes numbers rise once again. During the beginning stages of forecasting a
manager is able to analyze results of the Pro forma statement and other statements in an attempt
to identify areas that need attention, therefore taking care of issues while they are still in process,
or even months in advance. In addition to making adjustments to issues that arise, managers also
have a great opportunity to make changes so that projected goals can be made and opportunities
can be embraced.
The following graph illustrates the Pro forma process for the next five years based on
data from a 2014 sample provided (UOP, 2013). Based on this graph we can assume that there
will be an increase in sales due to a higher number of products being produced, new products
being introduced, and the quality of the products increasing. As shown, revenue will increase
approximately twice in 2015, followed by an increase of 10% in 2016. Cost of revenue is based

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on sales percentage, therefore 60.1% shows that both operating expense and selling expense will
increase in the same manner as sales will.
Forecast for the next five years based off numbers for 2014:

Income Statement

2014 % Ratio to Sales

2015

2016

2017

2018

2019

Sales
1,750,450
Returns and allowances
2,752
Net Sales
1,747,698

100.0

2,097,238

2,306,961

2,537,657

2,791,423

3,070,566

Cost of Sales
Beginning Inventory
50,000
Purchases
610,162
Production Labor
420,108
Ending Inventory
30,000
Total Cost of Sales 1,050,270
Gross Profit
697,428

60.1
39.9

1,260,324
836,914

1,386,356
920,605

1,524,992
1,012,665

1,677,491
1,113,932

1,845,240
1,225,325

Selling Expense
Wages
75,000
Commissions
25,000
Marketing
25,000
Total Selling Expenses 125,000

7.2

150,000

165,000

181,500

199,650

219,615

Operating Expense
Salaries
225,000
Payroll taxes
29,000
Benefits
27,000
Office Supplies
500
Postage
250
Professional Fees
2,000
Telephone
850
Utilities
950
Training & Education
250
Miscellaneous
50
Total Op. Expense 285,850

16.4

343,020

377,322

415,054

456,560

502,216

Op. Profit/EBITD 286,578

16.4

343,894

378,283

416,111

457,722

503,495

Other Income (Expense)
Interest
(9,650)
Depreciation
(12,000)
Amortization
(2,500)
Total Other Income
(24,150)

1.4

28,980

31,878

35,066

38,572

42,430

15.0

314,914

346,405

381,045

419,150

461,065

141,712

155,883

171,471

188,618

207,480

173,202

190,522

209,574

230,532

253,585

Total Pre-tax Profit

262,428

Income Tax Allowance

118,093

Net Profit

144,335

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Although used for forecasting more times than not there are other reasons that managers
use Pro forma analysis; including planning, looking at variances, adjustments, make corrections,
eliminate possible errors, decide what areas are weak versus what areas are strong, and the
evaluation of performance. Pro forma statements are created by forecasting balances on a
specific date and adding them to a financial statement. Forecasting is done by deciding how
specific things can affect and influence areas of the business, from there a projection can be
made to determine ending numbers.
The balance sheet below shows not only the current balance sheet for 2014, but also the
Pro forma sheet for the following five years as well. Once again it has been assumed that the
current assets and liabilities will continue to increase in the same ratio that sales have. In
addition, there are fixed assets that the business has, therefore the company has taken a loan out
to meet the expectations of capital expansion and capital needs.
Forecast for the next five years based off numbers for 2014:

Balance Statement

2014 % Ratio to Sales

2015

2016

2017

2018

2019

ASSETS
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets
Fixed Assets
Property—net of dep.
Equipment—net of dep
Vehicles—net of dep
Total Fixed Assets
Total Assets

10,525
27,000
30,000
2,000
69,525

215,000
80,000
5,000
300,000
369,525

.60
1.54
2.86
1.10

12,630
32,400
36,000
2,400
83,430

13,893
35,640
39,600
2,640
91,773

500,000
583,430

700,000
791,773

15,282
39,204
43,560
2,400
100,446

900,000
1,000,446

16,811
43,124
47,916
2,640
110,491

1,100,000
1,210,491

18,492
47,437
52,708
2,400
121,036

1,350,000
1,471,036

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LIABILITIES
Current Liabilities
Revolving lines of credit
20,000
Fixed
Accounts Payable
5,000
.29
Curr. Portion of LT Debt
15,000
Total Current Liabilities
40,000
Long-term Liabilities
LT debt and capital leases 45,500
Loans for stockholders
60,500
Total LT Liabilities
106,000
Total Liabilities
146,000
Stockholders Equity
Common stock
Additional Paid-in Capital
Ret. Earn.- Prior & Curr.
Total Stockholders Equity
Tot. Liabilities & Equity

1,000
25,000
197,525
223,525
369,525

6,000
30,000
56,000

6,600
42,000
68,600

7,260
40,439
67,699

7,986
39,225
67,211

8,785
39,225
68,010

70,203

75,424

75,424

55,424

61,586

130,703
186,703

135,924
204,524

135,924
203,623

115,924
183,135

122,086
190,096

370,727

561,249

770,824

1,001,355 1,254,941

583,430

791,773

1,000,447

1,210,490 1,471,036

Fixed

Fixed
Fixed

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References:

Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.).
Hoboken, N. J. John Wiley & Sons.
ProjectionHub. Retrieved from http://blog.projectionhub.com/pro-forma-financial-statements/