Pro-forma statements are projected financial statements. Typically, data is forecast one year in advance. The pro-forma income statements of the company show the expected income and costs for the following year, while the pro-forma balance shows the expected financial position, that is, assets, liabilities and stockholders' equity at the end of the forecast period.
Budget inputs in the preparation of pro-forma statements:
To properly prepare the income statement and the pro-forma balance sheet, certain budgets must be developed in a preliminary manner. The budget series begins with sales forecasts and ends with the cash budget. Below are the main ones:
- Sales forecast. Production program. Estimate of raw material utilization. Purchase estimates. Direct labor requirements. Factory cost estimates. Operating cost estimates. Cash budget. Previous period balance.
Using the sales forecast as a basic input, a production plan is developed that takes into account the amount of time required to produce an item from raw material to finished product. The types and quantities of raw materials required during the forecast period can be calculated based on the production plan. Based on these estimates of material utilization, a schedule can be prepared with dates and quantities of raw materials to be purchased.
Likewise, based on the production plan, estimates can be made of the amount of direct labor required, in units of work per hour or in current currency. Factory overhead, operating expenses, and specifically your selling and administrative expenses, can be calculated based on the level of operations necessary to sustain forecast sales.
Future projections. Pro forma statements are useful in the financial planning process of the business and in obtaining future loans.
Development of preliminary budgets:
The process of preparing pro-forma statements will be explained with a practical example:
Development of basic information:
The artifact manufacturing company produces and sells a commodity. It has two artifact models, Model X and Model Y. Although each model is produced with the same process, each requires different amounts of raw materials and labor.
Sales data:
The sale prices and the quantities sold are:
| Model | |||
| X | AND | Total | |
| Sale price | twenty | 27 | |
| Sold units | 1000 | 3000 | |
| Sales revenue | 20000 | 81000 | 101000 |
Labor and materials:
Each model of the product is made with two basic raw materials. Material A costs $ 2 per unit and B $ 0.50. Direct labor costs are $ 3 per hour.
| Model | ||
| X | AND | |
| Direct labor | 6 | 7.5 |
| Raw material cost | ||
| TO | two | two |
| B | one | 1.5 |
| Raw material cost per unit | 3 | 3.5 |
-
| Model | ||
| X | AND | |
| Direct labor (hours) | two | 2.5 |
| Raw materials (units) | ||
| TO | one | one |
| B | one | 3 |
Factory expenses:
The company's factory overhead, representing the expenditures necessary to sustain production, totaled $ 38,000.
| Indirect labor | 6000 |
| Factory supplies | 5200 |
| Heating, light and energy | 2000 |
| Supervision | 8000 |
| Maintenance | 3,500 |
| Engineering | 5500 |
| Tax and insurance | 2800 |
| Depreciation | 5000 |
| Total indirect expenses | 38000 |
-
| Model | |||
| X | AND | ||
| (1) Cost per MOD unit | 6 | 7.5 | |
| (2) Production in units | 1000 | 3000 | |
| (3) Total cost of labor by model | 6000 | 22500 | |
| (4) Total cost of labor | 28500 | ||
| (5) Percentage of total cost | twenty-one% | 79% | |
| (6) Distribution of indirect expenses | 7980 | 30020 | |
| (7) Distribution of expenses per unit | 7.98 | 10 |
The cost per unit of the X and Y models is $ 16.98 and $ 21 respectively.
Operating costs:
The operating expenses include the selling and administrative expenses of the previous year.
| Sales expense | ||
| Salary to vendors | 3000 | |
| Delivery rates | 800 | |
| Advertising | 1200 | |
| Total sales expenses | 5000 | |
| Admission expenses | ||
| Admission wages | 3100 | |
| Office supplies | 700 | |
| Telephone | 300 | |
| Fee | 900 | |
| Total adm spending | 5000 | |
| Total operating expense | 10000 |
Income statement:
As of December 31 of the previous period.
| Sales | ||
| model X | 20000 | |
| model Y | 81000 | |
| Total sales | 101000 | |
| (-) Cost of sales | ||
| Workforce | 28500 | |
| Material A | 8000 | |
| Material B | 5500 | |
| Indirect expenses | 38000 | |
| Total cost of sales | 80,000 | |
| Gross profit | 21000 | |
| (-) Operating costs | 10000 | |
| Operational utility | 11000 | |
| (-) interests | 1000 | |
| Income before taxes | 10000 | |
| (-) Taxes | 2200 | |
| Profit after tax | 7800 | |
| (-) Dividends on common shares | 4000 | |
| (-) Surplus | 3800 |
Pro-forma statements are useful not only in the internal financial planning process, but are normally required by interested parties, such as current lenders and third parties.
Balance sheet:
| Box | 6000 |
| Negotiable values | 4,016.4 |
| Accounts receivable | 13000 |
| Inventory | 15983.6 |
| Total current assets | 39000 |
| Net fixed assets | 51000 |
| Total assets | 90000 |
| Debts to pay | 12000 |
| Taxes to pay | 3740 |
| Other current liabilities | 6260 |
| Total current liabilities | 22000 |
| Long-term debt | 15000 |
| Stockholders' equity | |
| Ordinary shares | 30000 |
| Surplus | 23000 |
| Total liabilities and capital | 90000 |
Inventory decomposition:
| Units | Value | |
| Raw materials inventory | ||
| Material A | 600 | 1200 |
| Material B | 4000 | 2000 |
| Total | 3200 | |
| Inventory of finished products | ||
| Model X | 320 | 5,433.6 |
| Model Y | 350 | 7350 |
| Total | 12,783.6 | |
| Total inventory | 15983.6 |
Sales forecast:
| Sales in units | |
| Model X | 1500 |
| Model Y | 2800 |
| Sales value | |
| Model X ($ 25 per unit) | 37500 |
| Model Y ($ 35 per unit) | 98000 |
| Total | 135500 |
Production plan:
| Model | ||
| X | AND | |
| Desired ending inventory | 120 | 800 |
| (+) Predicted sales | 1500 | 2800 |
| Total needs | 1620 | 3024 |
| (-) Initial inventory | 320 | 350 |
| Production required | 1300 | 2674 |
Necessary purchases of raw material:
| Model | ||
| X | AND | |
| Desired ending inventory | 500 | 3000 |
| (+) Utilization required | 3974 | 10622 |
| Total requirement | 4474 | 13622 |
| (-) Initial inventory | 600 | 4000 |
| Necessary purchases | 3874 | 9622 |
Pro forma income statement:
| Sales | 135500 |
| (-) cost of sale | 104,524.2 |
| Gross profit | 30,975.8 |
| (-)Operating costs | 16000 |
| Operational utility | 14975.8 |
| (-) Interest | 1000 |
| Income before tax | 13,975.8 |
| (-) Taxes | 3,074.68 |
| Profit after tax | 10,901.12 |
| (-) Dividends for shares | 4000 |
| (-) To surplus | 6901.12 |
Pro-forma balance sheet:
| Box | 6000 |
| Negotiable values | 4,016.4 |
| Accounts receivable | 5750 |
| Inventory | 11 151.44 |
| Total current assets | 26,917.84 |
| Net fixed assets | 64000 |
| Total assets | 90,917.84 |
| Debts to pay | 1,255.9 |
| Taxes to pay | 3,074.68 |
| Documents to pay | 5,433.1 |
| Other current liabilities | 6260 |
| Total current liabilities | 16023.68 |
| Long-term debt | 15000 |
| Stockholders' equity | |
| Ordinary shares | 30000 |
| Surplus | 29,901.12 |
| Total liabilities and capital | 90,917.84 |
Here is a series of practical video-lessons, taught by Professor Marcel Ruiz, in which you will be able to see how the balance sheet and the income statement are projected by different methods: by T accounts, using sales forecast, by percentage of sales and by the method of judgment. Good material to complement your learning about pro forma financial statements. (11 videos)
