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Analyzing Pro Forma
Statements
FIN/571
June 2, 2014
Gurpreet Atwal
Analyzing Pro
Forma Statements
XYZ Company has decided to expand the business
and produce two to three new products this year. They have requested the
finance department put together a Pro Forma Statement showing the next five
years to help assess any issues that may arise due to the expansion. A Pro
Forma Statement is put together to show the company and the investors what the
future profits will be and any “hot spots†that the company may need to be
aware of. The following is a projection of the next five years showing an
increase in sales, as a result, of the new products and an increase in
production. With the increase of sales, the company was able to acquire fixed
assets with the extra cash and they have taken a loan to expand the company. Net
Sales will increase from $1,747,698 to $3,070,566 in year five.
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Net sales will double over the first two years then it will
continue to increase at 10% in the following years. The cost of revenue is
bases on the sales percentage, for example, 60.1%, other operating expense and
selling expenses will increase in the same ratio as sales. Also, there is an
assumption that the company acquired more property, plant, and equipment
because of the expansion. The company feels comfortable with $20,000 as the
amount for revolving lines of credit along with $60,500 for the loans payable
to stockholders. The company’s long-term debt fluctuates over the next five
years but does end at a stable number.
When looking at the Pro Forma Balance Sheet,
there is an assumption that current assets and current liabilities have
increased in the ratio of sales. There is also an addition of fixed assets in
the business. Also, the company as stated before has taken a loan to meet the
expansion and the needs of working capital. Overall, expanding the business and
producing new products will be good for the company’s bottom line. Not only
does Net Sales increase over the next five years, but Gross Profit does, and it
almost doubles.
References
University of Phoenix, (2014)
“Analyzing Pro Forma Statements†retrieved from https://new
classroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:46786434/context/co/view/activityDetails/activity/53c06956-87e9-4050-8ecc-15e914705e0/expanded/False/tab/
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