Analyzing Pro Forma Statements

Pro forma income statement is similar to historical income statement, the difference is that the pro forma income statement projects the future. Pro forma income statements provide an important benchmark for operating a business throughout the year ( BusinessTown 2001 ). It provides the information that they need to help them make the right choices for their business. The XYZ Company are looking to increase their sales in the next five years.

The company will introduce a new product and they will also maximize capacity in order to achieve company’s growth. Through the increase sale, the company will be able to get fixed assets with the use of their excess cash and in necessary they will take some loans to cover the additional cost that will arise. The pro forma income statement show a 12% increase in their gross sales and in the next five years there will be an 11% increase.

There will be an increase in the cost of sales and those for the supplies, raw materials and product ion labor of the company that will happen when they start to add the new product. The increase will be tied to the expense of selling and under that are the new products commission sale, marketing the new product and hiring new workers. The total cost of sale represent 60.1 % and the gross profit is 39.9% of increase on sales. The total operating expenses will be 16.4 % of the sales and under that are payroll taxes, major expenses wages and benefits. Under the wages is hiring new worker, if needed, but the main goal is maximize the gain using their existing resources. The payroll taxes and benefits are all depends on the wages that the company paid. If the projection sales will be met according to the estimation, then the company can pay dividends to their shareholders. They should consider delaying the payments of dividends if they need to invest in their fixed assets.

The accounts that are payable to their suppliers represent 29% of their sales, more expense are