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Notes On Proforma Financial Statement

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18 views

Notes On Proforma Financial Statement

Uploaded by

2023101547
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL FORECASTING

- The main objective to do financial forecasting is to estimate the firm’s future


financial needs and projected profit
- 2 methods that can be used to forecast are:
i) Pro-forma Financial Statement
ii) Cash Budget

PRO-FORMA FINANCIAL STATEMENT

- 2 types of pro-forma financial statement : i) Pro-forma Balance Sheet


ii) Pro-forma Income Statement
- To construct the pro-forma financial statement, firm has to estimate the level of
assets, liabilities or expenses for a future period based on the percent of sales
method
- Constructing pro-forma financial statement enables the firm to identify whether it
will require additional assets and funds to support the new sales level

- The firm relies on both, internal (spontaneous) and external (non-spontaneous


sources of financing to support the fund’s requirement
o Spontaneous sources of financing represents the balance sheet items
that vary directly with sales activity
 In essence, all current assets and current liabilities are spontaneous
 Fixed asset will only spontaneous if the firm is operating at full
capacity
 Retained earnings are spontaneous (but need to show the additional
retained earnings – where it has included dividend payout ratio)

o Non-spontaneous sources of financing will remain constant regardless of


the sales activity
 Fixed assets are regarded as non-spontaneous if the firm is
operating below its capacity
 Notes payable (even though it is a current liability) is regarded as
non-spontaneous as it is part of firm’s financing
 long-term debt and equity are also non-spontaneous as the firm
must negotiate and arrange for more borrowings and issues
respectively.

Pro-forma Income Statement


To construct this statement, firm must consider all items in the income statement that are
directly related to sales because any changes in sales will result in a change in the cost
of the items

Pro-forma Balance Sheet


To construct this statement, 4 steps will be involved:

1. Determine the sales growth


2. Project the level of each assets and liabilities account using the percent of sales
method. (determine the spontaneous items)

3. Project the new level of retained earnings


New retained earnings=previous retained earnings + additional retained earnings
Additional RE= Projected sales x Net profit margin x (1- dividend payout ratio)
= projected sales x Net income x ( 1- cash dividend )
Sales net income

4. Calculate the company’s additional financing needed (AFN)


AFN = projected total assets – projected total liabilities - projected owners
equity

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