Analyzing Pro Forma Statements Essay

Analyzing Pro Forma Statements

Melissa Fondevilla

FIN/571

August 31, 2015

Gurpreet Atwal

Analyzing Pro Forma Statements

After reviewing the XYZ Company Inc.’s financial statements a pro forma statement can be created.  A pro forma statement is a projected financial statement that reflects a set of assumptions in regards to investment, financing and operating decisions (Parrino Kidwell, and Bates, 2012).  The XYZ Company Inc. would like to grow their organization by introducing a new product.  To appropriately plan and forecast how this decision is going to affect the company a pro forma statement projecting five years is prepared.  The introduction of the new product will increase sales and the company will attain fixed assets with the excess cash flow and the procurement of a loan to meet the capital expansion and working capital needs.

Income Statement

When reviewing the pro forma income statement it is found that there is a potential for the net profit to increase over a five year period (Fig 1-1).  The increase in the cost of sales is attributed to the increase in purchases and labor minus the inventory left from the previous year.  The totals cost of goods sold is represented by a 60.1% increase of sales.  The gross profit is represented by a 39.9% decrease of net sales (100% net sales-60.1% total cost of goods sales).  Operating expenses are 16.4% of sales and include general expenses such as office supplies and utilities.  The total pre-tax profit is the difference between the operating profit and interest, depreciation and amortization.  Lastly the net profit is found after subtracting the income tax allowances from the pre-tax profit.  

Balance Sheet

The pro forma balance sheet (Fig 1-2) provides assumptions for the assets and liabilities and ultimately what the total liabilities and equity could look like after a five year period.  This is assuming that current asset and current liability increases in the ratio of sales.  This also shows the loan (long-term debt and capital leases) that the company obtained to meet the capital needs.  The total stockholder’s equity will continue to grow as well if the sales continue to increase.