Pro Forma Financial Statements
Dr. Nancy Mangold
California State University, East Bay
Preparing Pro Forma Financial Statements – Step 1
Project Operating Revenue Sales revenue Other revenue
Preparing Pro Forma Financial Statements – Step 2
Projecting Operating Expenses Cost of Goods Sold Selling and Administrative Expenses Net Income Before Interest and Taxes
Preparing Pro Forma Financial Statements – Step 3
Project Assets Cash Accounts Receivable Inventories Other Current Assets Investments Fixed Assets Other Assets
Preparing Pro Forma Financial Statements – Step 4
Project Liabilities and Contributed Capital Accounts Payable Notes Payable Other Current Liabilities Long-Term Debt Other Liabilities Contributed Capital
Preparing Pro Forma Financial Statements – Step 5
Project Retained Earnings Retained Earnings
Preparing Pro Forma Financial Statements – Step 5
Project Cost of Financing, Income Tax Expense and the Change in Retained Earnings Interest Expense Income Tax Expense Net Income Dividends Change in Retained Earnings
Preparing Pro Forma Financial Statements – Step 6
Project the Statement of Cash Flows Investing Acquisition of Fixed Assets Sale of investments Acquisition of Investments Other Investing Transactions Cash Flow from Investing
Project Sales and Other Revenues
Price: Consider general price inflation specific industry factor affecting demand excess capacity shortages of raw materials prices of substitute products
Volume: Consider growth rate in the general population
Project Sales and Other Revenues
Use historical growth rate adjust for major acquisition or sale cyclical sales pattern
• use varying growth rate International sales
– Consider
– international competition
– value of dollars
Projecting Other Revenues
Use historical percentage of sales
Project Operating Expenses
Projection depends on the behavior of the cost items
Variable cost use common size income statement percentages
multiplied by projected sales
High fixed costs estimate the VC and FC of the firm use historical growth rates for individual items
Project Operating Expenses
Cost of Goods Sold VC use projected cost of goods sold percentage of
sales
Selling and Administrative Expenses use projected S & A percentage of sales
Year 8 Projected
Year 9 Projected
Year 10 Projected
Year 11 Projected
Year 12 Projected
Sales $19, 659 $20, 839 $22, 089 $23, 414 $24, 819Other Revenues 590 625 663 702 745Cost of Goods Sold (7, 077) (7, 502) (7, 952) (8, 429) (8, 935)Selling and Administrative (7, 864) (8, 335) (8, 836) (9, 366) (9, 928)Interest Expense (325) (403) (494) (599) (716)Net Income before Income Taxes $4, 983 $5, 223 $5, 470 $5, 723 $5, 985Income Tax Expense 1, 545 1, 619 1, 696 1, 774 1, 855Net Income $3, 438 $3, 604 $3, 774 $3, 949 $4, 130Dividends (1, 397) (1, 564) (1, 752) (1, 962) (2, 198)Change in Retained Earnings $2, 041 $2, 040 $2, 022 $1, 987 $1, 932
EXHIBIT 10.2
Pro Forma Statement of Income and Retained Earnings for Coke (amounts in millions)
Project the Assets on the Balance Sheet
Project total Assets use common size balance sheet percentages to
allocate the total assets among individual asset items
Project Individual assets sum up individual asset amounts to obtain total
assets
Project the Assets on the Balance Sheet
Projected Total Assets ApproachUse historical growth rate in assets
compound annual growth rate over five years
Year 7 Actual Assets $16, 161 —Year 8 Projected Assets $17, 729 9. 7%Year 9 Projected Assets $19, 448 9. 7%Year 10 Projected Assets $21, 335 9. 7%Year 11 Projected Assets $23, 404 9. 7%Year 12 Projected Assets $25, 674 9. 7%
Amount Percentage Change
Project the Assets on the Balance Sheet
Alternative ApproachUse Total Assets Turnover Ratio
Projected Sales = Ave. total assets
Projected Total Assets Turnover2 x Ave. Total Assets - Beg. Assets = ending
assets
Total Assets
Sales
Total Assets
Turnover
Average Total
AssetsBeginning
of YearEnd of Year
Year 8 Projected Assets $19, 659 1. 2 $16, 383 $16, 161 $16, 604Year 9 Projected Assets $20, 839 1. 2 $17, 365 $16, 604 $18, 216Year 10 Projected Assets $22, 089 1. 2 $18, 407 $18, 216 $18, 689Year 11 Projected Assets $23, 414 1. 2 $19, 512 $18, 689 $20, 334Year 12 Projected Assets $24, 819 1. 2 $20, 683 $20, 334 $21, 031
Project Assets on Balance Sheet
May create sawtooth problem
Dol
lars
Year
4321
Illustration of Difficulty Sometimes EncounteredWhen Projecting Total Assets Using Assets Turnover
Sales
Assets
Project Assets on Balance Sheet
use compound annual rate to smooth the rate of increase in assets
(Projected Ending Assets(yr 5)/
Beg. Assets (yr 0)) ^(1/5)($21,030/$16,161)^(1/5)
Year-End Assets
Percentage Increase
Year-End Assets
Percentage Increase
Year 7 $16, 161 7. 40% $16, 161Year 8 $16, 604 2. 70% $17, 035 5. 41%Year 9 $18, 216 9. 20% $17, 957 5. 41%Year 10 $18, 689 3. 10% $18, 928 5. 41%Year 11 $20, 334 8. 80% $19, 952 5. 41%Year 12 $21, 031 3. 40% $21, 031 5. 41%
Project Assets on Balance Sheet
Another AlternativeBased the asset turnover on the ending
balance instead of the average balance Sales/ending total assets = projected total asset
turnover Projected sales/ projected total asset turnover =
Year-end assets
SalesTotal
Assets Year-End
AssetsPercentage
IncreaseYear 7 Actual $18, 546 1. 15 $16, 161Year 8 Projected $19, 659 1. 15 $17, 095 6%Year 9 Projected $20, 839 1. 15 $18, 120 6%Year 10 Projected $22, 089 1. 15 $19, 208 6%Year 11 Projected $23, 414 1. 15 $20, 360 6%Year 12 Projected $24, 819 1. 15 $21, 582 6%
Project Assets on Balance Sheet
Use common size balance sheet percentages to allocate the total assets to individual assets
Year 8 Projected
Year 9 Projected
Year 10 Projected
Year 11 Projected
Year 12 Projected
AssetsCash $1, 585 $1, 732 $1, 894 $2, 071 $2, 265Marketable Securities 176 192 210 230 252Accounts Receivable 1, 768 1, 904 2, 051 2, 210 2, 380Inventories 1, 045 1, 148 1, 261 1, 384 1, 520Other Current Assets 1, 759 1, 865 1, 976 2, 095 2, 220 Total Current Assets $6, 333 $6, 841 $7, 392 $7, 990 $8, 637Investments 6, 543 7, 197 7, 917 8, 708 9, 579Property, Plant, and Equipment (cost) 6, 188 6, 859 7, 604 8, 430 9, 346Accumulated Depreciation (2, 252) (2, 496) (2, 767) (3, 068) (3, 401)Other Assets 798 846 897 951 1, 008 Total Assets $17, 610 $19, 247 $21, 043 $23, 011 $25, 169Liabilities and Shareholders' Equity
Accounts Payable $3, 125 $3, 285 $3, 454 $3, 632 $3, 819Notes Payable 4, 288 5, 115 7, 015 8, 470 10, 563Current Maturities of Long-Term Debt 9 422 16 257 2Other Current Liabilities 1, 099 1, 165 1, 235 1, 310 1, 387 Total Current Liabilities 8, 521 9, 987 11, 720 13, 669 15, 771Long-term Debt 1, 233 1, 347 1, 473 1, 611 1, 762Deferred Income Taxes 319 338 358 380 403Other Noncurrent Liabilities 1, 253 1, 329 1, 408 1, 492 1, 582
Total Liabilities $11, 326 $13, 001 $14, 959 $17, 152 $19, 518Common Stock $2, 203 $2, 534 $2, 914 $3, 351 $3, 854Retained Earnings 17, 169 19, 209 21, 231 23, 218 25, 149Other Equity Adjustments (601) (637) (675) (716) (759)Treasury Stock (12, 487) (14, 860) (17, 386) (19, 994) (22, 593) Total Shareholders' Equity $6, 284 $6, 246 $6, 084 $5, 859 $5, 651 Total Liabilities and Shareholders' Equity $17, 610 $19, 247 $21, 043 $23, 011 $25, 169
Pro Forma Balance Sheet for Coke (amounts in millions)
Projected Individual Asset Approach
Use historical growth rate for individual assets Assets linked to operations tie to growth in
sales Accounts receivable Inventories Fixed assets
Use asset turnovers
Projected Individual Asset Approach
Cash & Marketable Securities plug in figure Change in cash on the balance sheet must agree to
change in cash on the projected statement of cash flows
If cash is too high, assume the firm will invest the excess in marketable securities or pay down borrowings
If negative, the firm uses short-term borrowings to bring about a desired level of cash
Projected Individual Asset Approach
Accounts Receivable Use receivables turnover Sales/Receivables turnover = Ave. accounts
receivable 2*Ave. AR - beg. AR = ending AR smooth the Sawtooth problem using compound
growth rate
(Ending AR/Beg. AR) ** 1/5
Accounts Receivable
Accounts SalesReceivable Turnover
Average Accounts
ReceivableBeginning
of YearEnd of Year
Year 8 Projected $19, 659 11. 1 $1, 771 $1, 641 $1, 901Year 9 Projected $20, 839 11. 1 $1, 877 $1, 901 $1, 854Year 10 Projected $22, 089 11. 1 $1, 990 $1, 854 $2, 126Year 11 Projected $23, 414 11. 1 $2, 109 $2, 126 $2, 092Year 12 Projected $24, 819 11. 1 $2, 236 $2, 092 $2, 380
Year-End Accounts Receivable
Year 7 Actual $1, 641 —Year 8 Projected $1, 768 7. 72%
Year 9 Projected $1, 904 7. 72%Year 10 Projected $2, 051 7. 72%Year 11 Projected $2, 210 7. 72%Year 12 Projected $2, 380 7. 72%
Percentage Increase
Projected Individual Asset Approach
Inventories use inventory turnover Sales/Inventory turnover = Ave. inventories 2*Ave. Inv - Beg. Inv. = Ending Inv Smooth the sawtooth problem using compound
growth (Ending Inv/Beg. Inv) ** 1/5
Cost of Goods Sold
Inventory Turnover
Average Inventories
Beginning of Year
End of Year
Year 8 Projected $7, 077 6. 5 $1, 089 $952 $1, 226
Year 9 Projected $7, 502 6. 5 $1, 154 $1, 226 $1, 082Year 10 Projected $7, 952 6. 5 $1, 223 $1, 082 $1, 365Year 11 Projected $8, 429 6. 5 $1, 297 $1, 365 $1, 229Year 12 Projected $8, 935 6. 5 $1, 375 $1, 229 $1, 520
Year-End InventoriesYear 7 Actual $952 —
Year 8 Projected $1, 045 9. 81%
Year 9 Projected $1, 148 9. 81%Year 10 Projected $1, 261 9. 81%Year 11 Projected $1, 384 9. 81%Year 12 Projected $1, 520 9. 81%
Percentage Increase
Projected Individual Asset Approach
Other Current Assets use growth rate in sales
Investments in Securities use compound annual growth rate
Property, Plant and Equipment use fixed assets turnover (follow AR, Inv)
Other Assets use growth in sales
Projected Individual Asset Approach
If common size Financial Statement indicateCash and Marketable Securities
10% of Assets
(AR+Inv+Other current assets+PPE+other assets)/90% = Total assets
Total assets * percentage cash = cashTotal assets * percentage marketable securities =
marketable securities
Project Liabilities and Shareholders’ Equity
Projected total asset approachUse common size balance sheet percentages to
project Individual liabilities Shareholders’ equity
Project individual liabilities and shareholders’ equity accounts use historical growth rates use turnover ratios
Project Liabilities and Shareholders’ Equity
Accounts Payableuse AP turnoverCOGS + End Inv - Beg Inv = Purchases Purchases/ AP turnover = Ave APAve AP * 2 - Beg AP = Ending AP balanceUse compound annual AP growth rate to
smooth AP(Proj end AP/ beg AP ) **1/5
Project Liabilities and Shareholders’ Equity
Notes Payable plug (projected assets - projected liab and
equity)
Current Maturities of LT Debt use disclosed amount
Other Current Liabilities use growth rate in sales
Project Liabilities and Shareholders’ Equity
Long Term Debt use percentage of LT debt to total assets
Deferred Income Taxes relate to operating items (employee benefits,
PPE, equity investment, intangible assets) use growth rate in sales
Other Noncurrent liabilities use growth rate in sales
Project Liabilities and Shareholders’ Equity
Contributed Capital- Year-end Common Stock use compound annual growth rate
Other Equity Adjustments Foreign currency translation adjustment Unrealized gains on securities for sale use growth rate in sales
Treasury stock use projected compound growth rate
Project the Cost of Financing
Interest ExpenseShort term borrowing
Ave notes Payable * proj. interest rate
Long term borrowing Ave long term debt * proj. Interest rate
Project Income Tax Expense
Income Taxes use effective tax rate
Project Retained Earnings
Dividends use compound annual dividend growth rate
Change in Retained Earnings Beginning R/E + Net income - Dividends =
Ending Retained Earnings
Project the Statement of Cash Flows
Net income Pro forma income statement
Depreciation Change in accumulated depreciation
Other addbacks increase in deferred income taxes other noncurrent liabilities
Project the Statement of Cash Flows
Changes in operating current asset and current liability - pro forma balance sheet
Acquisition of PPE Change in PPE from pro forma B/S
Other Investing Transactions change in other assets
Increases in borrowing increase in Notes Payable and LT Debt
Project the Statement of Cash Flows
Changes in Common Stock Changes in common stock, paid-in capital, and
treasury stock
Dividends Projected amount each year
Change in Cash Net to the change in cash on the comparative
balance sheet
EXHIBIT 10.5Pro Forma Statement of Cash Flows for Coke
(amounts in millions)Year 8
ProjectedYear 9
ProjectedYear 10
ProjectedYear 11
ProjectedYear 12
ProjectedOperations(1) Net Income $3, 438 $3, 604 $3, 774 $3, 949 $4, 130(2) Depreciation 221 244 271 300 334(3) Other Addbacks (net) 55 58 62 65 69(4) (Increase) in Accounts Receivable (127) (136) (147) (159) (170)(5) (Increase) in Inventories (93) (103) (113) (123) (136)(6) (Increase) in Prepayments (100) (106) (112) (119) (126)(7) Increase in Accounts Payable 153 160 169 178 187(8) Increase in Other Current Liabilities 63 67 70 75 78 Cash Flow from Operations $3, 610 $3, 788 $3, 974 $4, 166 $4, 366Investing(9) Acquisition of Marketable Securities and Investments (net) ($546) ($671) ($738) ($811) ($892)(10) Acquisition of Property, Plant, and Equipment (607) (671) (745) (825) (917)(11) Other Investing Transactions (45) (48) (51) (55) (57) Cash Flow from Investing ($1, 198) ($1, 390) ($1, 534) ($1, 691) ($1, 866)Financing(12) Increase (Decrease) in Short-term Borrowing $900 $827 $1, 899 $1, 456 $2, 092(13) Increase in Long-term Debt 117 528 (280) 379 (104)(14) Increase in Common Stock 287 331 380 437 503(15) Dividends (1, 397) (1, 564) (1, 752) (1, 962) (2, 198)(16) Acquisition of Common Stock (2, 167) (2, 373) (2, 526) (2, 608) (2, 599) Cash Flow from Financing ($2, 260) ($2, 251) ($2, 279) ($2, 298) ($2, 306)(17) Change in Cash 152 147 161 177 194 Cash-Beginning of Year 1, 433 1, 585 1, 732 1, 894 2, 071 Cash-End of Year $1, 585 $1, 732 $1, 893 $2, 071 $2, 265
Analyzing Pro Forma Financial Statements
Serves as a base case that an analyst can use to asses the impact of various changes for a company
Changes in various assumptions will have different effects
Use spreadsheet to observe the effect on the financial statement ratios
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