The outputs from the financial planning model are projected financial statements called pro forma financial statements. In finance and accounting, the term pro forma means forecasted or projected (Parrino, 2012). These statements are prepared on the basis of the inputs and assumptions that are fed into the financial model. This paper presents an analysis of the pro forma income statement and pro forma balance sheet of a fictitious company called XYZ Company inc. Appendix A provides a sample of Profit and Loss statement and the Balance sheet of XYZ Company, INC., provided by the UOP. It also provides a five year projected sales and cost of sales. XYZ Company assumes a 10% increase in sales for the upcoming five years. We also assume that there is a 10% increase in the cost of sales. Other operating and selling expenses are also assumed to raise 10%.
It also assumes that the interest, depreciation and amortization rates will be 5 percent increase for the next five years. This can be calculated by analyzing the past balance sheets and income statements. With a 10% increase in sales the company has an initiative to expand its facility at the end of five years. Using the pro forma statements managers and investors can have a clear view of the company’s cash flows. The company is planning to use debt to cover the expense of opening a new facility. This will raise the fixed costs, but it expects to increase sales by 15% after the new facility is constructed. The company’s short term and long term obligations such payroll, marketing expenses, Inventory purchases and interest rates are all provided in the pro forma statement. With that as an input, the company’s projected sales and cost can be calculated as,
Projected sales at the end of five years = $2,814,685.106
Projected costs at the end of five years = $1,691,470.338
Projected net income after all expenses at the end of five years = $240,525 From the balance sheet at the end of five years
The projected total asset = $595,123.71
The projected current liability = $64,420.4
The projected long term liability = $235,134.5
The projected stockholder equity = $359,989.25
The new facility at the end of 5 years is expected to be $200,000
To determine whether the project is feasible as planned, management needs to prepare a set of pro forma financial statements that include the cost of the new facility (Parrino, 2012). The company assumes that the income statement does not change because of the new facility building expenses. The table below shows the balance sheet that does not balance with the new facility that is added to the assets.