Analyzing Pro Forma Statements for XYZ Company, INC.

An initiative has been proposed by one of the executives to use expansion of the product
line in attemp to increase XYZ's sales. .
The expansion of the product line will cost $200,000 of capital.
This strategic move is expected to generate increase in sales by 20% s each year for the next five years
A Pro Forma finacial statement covering the next five years is neede to present to determine the possible
impact of this strategic move. The Pro Forma statements will be based on the current year's Balance Sheet
and Profit/Loss Statement and are projected for a 10% increase in sales each year for the next five years.
Assumptions:
1. Projection of 10% increase in sales each year for the next five year as the result of this product line expansion.
2. The product line expansion will cost $200,000 using internal financing.
Net sales $1,747,698 Assets $369,525 Debt $146,000
Costs 1,050,270 Equity 223,525
Net income $697,428 Total $369,525 Total $369,525
XYZ Company expects sales to increase by 20% as a result in expanding product line in the market.
Compute for the projected sales, costs, assets, debt and equity.
Projected sales = $1,747,698 x 1.10 = $1,922,467.80
Projected costs = $1,050,270 x 1.10 = $1,155,279
Projected assets = $369,525 x 1.10 = $406,477.50
Projected Debt = $146,000 x 1.10 = $160,600
Projected Equity = $223,525 x 1.10 = $245,877.50
Net sales $1,922,467.80
Costs 1,155,279
Net income $767,188.80
XYZ Company, INC.
Current Financial Statements ($ thousands)
XYZ Company, INC.
Pro Forma Income Statement ($ thousands)
Income Statement Balance Sheet
Assets $406,477.50 ($36,952.50) Debt $160,600 ($14,600)
Equity 245877.5 ($22,352.50)
Total $406,477.50 ($36,952.50) Total $406,477.50 ($36,952.50)
Analysis:
The balance sheet is now balance because both the sources and use of funds have increased by 10%.
The $36,952.50 in new asset is being financed by $22,352.50 from retained earning (internal financing using equity)
and $14,600 from new long-term debt (external financing).
However, the equity account does not look right. XYZ's projected net income was $767,188.80.
Adding this ammount to the initial equity account balance of $223,525 yields a final equity balance
of $990,713.80 which is an apparent conflict. To solve for this problem, it is important to reconcile
the account. If the firm is not expected to sell or repurchase stock, there are two basic transactions that
could take place during the year. One, the firm could generate income that is added to the retained earnings.
Second option is that the management could pay a cash dividend , which is subtracted from the retained earnings.
Because the pro forma equity balance is lower than the sum of the initial equity account balance plus XYZ's net income,
the forecast assume the firm will pay a dividend. But for this activity, I will choose to add the retained
earning in the pro forma balance sheet.
initial equity $223,525
XYZ Company, INC.
Pro Forma Balance Sheet ($ thousands)
plus net income $697,428
Total $920,953 Pro forma equity = $245,877.50 lower than the initial equity
and net income
Calculation for the payment of cash dividend:
Formula:
Dividends = Beginning equity balance + Net income - Ending equity balance
Dividends = $223,525 + $767,188.80 - $245,877.50
Dividends = $990,713.80-$245,877.50
Dividends = $744,836.30
The net income of $767,188.80 and the constraint that the ending equity balance is $268,230 will make
the company to pay $744,836.30 of dividends.
Percent Ratio
to the Sales
Income Statement
Net sales 100%
Cost of goods sold 60.1%
Gross profit 39.9%
Selling expense 7.2%
Operating expense 16.4%
Operating profit (EBITDA) 16.4%
Other income (expense) 1.4%
Pretax profit (EBITDA - Total other Income (Expense) 15.0%
Income tax allowance (45%)
Net Profit
Balance Sheet
Current Assets
Cash 0.60%
Account Receivable 1.54%
Inventory 1.72%
Prepaid Expenses 0.11%
Total Current Assets
Fixed Assets
Net Property, Equipment and Vehicle Depreciation Fixed
Total Fixed Assets
Total Assets
Liabilities
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
Inventory
Accounts payable 0.29%
Revolving line of credit 1.14
Current Portion of Long-term Debt 0.86%
Total Current Liabilities
Long-term Liabilities
Long-term debt and capital leases 2.60%
Loans payable to stockholders 3.46%
Total Long-Term Liabilities
Total Liabilities
Stockholders Equity
Common stock 0.06%
Additional Paid-in Capital 1.43%
Retained earnings
Total Stockholders Equity
Total Liabilities and Stockholders Equity
0 1 2 3
20XX 20x1 20x2 20x3
1,747,698 $ 2,097,237.60 $ 2,516,685.12 $ 3,020,022.14 $
1,050,270 $ 1,260,324 $ 1,512,388.80 $ 1,814,866.56 $
697,428 $ 836,913.60 $ 1,004,296.32 $ 1,205,155.58 $
125,000 $ 151,001.11 $ 181,201.33 $ 217,441.59 $
285,850 $ 343,946.97 $ 412,736.36 $ 495,283.63 $
286,578 $ 341,965.53 $ 410,358.63 $ 492,430.36 $
24,150 $ 29,361.33 $ 35,233.59 $ 42,280.31 $
262,428 $ 312,604.20 $ 375,125.04 $ 450,150.05 $
118,093 $ 140,671.89 $ 168,806.27 $ 202,567.52 $
144,335 $ 171,932.31 $ 206,318.77 $ 247,582.53 $
10,525 $ 12,583.43 $ 15,100.11 $ 18,120.13 $
27,000 $ 32,297.46 $ 38,756.95 $ 46,508.34 $
30,000 $ 36,072.49 $ 43,286.98 $ 51,944.38 $
2,000 $ 2,306.96 $ 2,768.35 $ 3,322.02 $
69,525 $ 83,260.33 $ 99,912.40 $ 119,894.88 $
300,000 $ 300,000.00 $ 300,000.00 $ 300,000.00 $
300,000 $ 300,000.00 $ 300,000.00 $ 300,000.00 $
369,525 $ 383,260.33 $ 399,912.40 $ 419,894.88 $
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
Year
30,000 $
5,000 $ 6,081.99 $ 7,298.39 $ 8,758.06 $
20,000 $ 23,908.51 $ 20,000.00 $ 20,000.00 $
15,000 $ 18,036.24 $ 21,643.49 $ 25,972.19 $
40,000 $ 48,026.74 $ 48,941.88 $ 54,730.25 $
45,500 $ 54,528 $ 65,433.81 $
60,500 $ 72,564.42 $ 87,077.31 $ 60,500.00 $
106,000 $ 127,092.60 $ 152,511.12 $
146,000 $ 175,119.34 $ 201,453.00 $
$1,000 1,258.34 $ 1,510.01 $ 1,000.00 $
$25,000 29,990.50 $ 25,000.00 $ 25,000.00 $
$197,525 171,932.31 $ 206,318.77 $
$223,525 203,181.15 $ 232,828.78 $
$369,525 378,300.49 $ 434,281.78 $
4 5
20x4 20x5
3,624,026.57 $ 4,348,831.89 $
2,177,839.87 $ 2,613,407.85 $
1,446,186.70 $ 1,735,424.04 $
260,929.91 $ 313,115.90 $
594,340.36 $ 713,208.43 $
590,916.43 $ 709,099.72 $
50,736.37 $ 60,883.65 $
540,180.06 $ 648,216.07 $
243,081.03 $ 291,697.23 $
297,099.03 $ 405,135.04 $
21,744.16 $ 26,092.99 $
55,810.01 $ 66,972.01 $
62,333.26 $ 74,799.91 $
3,986.43 $ 4,783.72 $
143,873.85 $ 172,648.63 $
300,000.00 $ 300,000.00 $
300,000.00 $ 300,000.00 $
443,873.85 $ 472,648.63 $
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
Year
10,509.68 $ 12,611.61 $
20,000.00 $ 20,000.00 $
31,166.63 $ 37,399.95 $
61,676.31 $ 70,011.57 $
60,500.00 $ 60,500.00 $
1,000.00 $ 1,000.00 $
25,000.00 $ 25,000.00 $
Balance Sheet
Current Assets
Cash
Account Receivable
Inventory
Prepaid Expenses
Total Current Assets
Fixed Assets
Net Property, Equipment and Vehicle Depreciation
Total Fixed Assets
Total Assets
Liabilities
Accounts payable
Revolving line of credit
Current Portion of Long-term Debt
Total Current Liabilities
Long-term Liabilities
Long-term debt and capital leases
Long-term loan (for product expansion)
Loans payable to stockholders
Total Long-Term Liabilities
Total Liabilities
Stockholders Equity
Common stock
Additional Paid-in Capital
Retained earnings
Total Stockholders Equity
Total Liabilities and Stockholders Equity
10,525 $ 12,630.00 $
27,000 $ 32,400.00 $
30,000 $ 36,000.00 $
2,000 $ 2,400.00 $
69,525 $ 83,430.00 $
Net Property, Equipment and Vehicle Depreciation Fixed 300,000 $ 300,000.00 $
300,000 $ 300,000.00 $
369,525 $ 383,430.00 $
5,000 $ 6,000.00 $
20,000 $ 24,000.00 $
15,000 $ 18,000.00 $
40,000 $ 48,000.00 $
45,500 $ 54,600 $
- $ 200,000 $
60,500 $ 72,600.00 $
106,000 $ 127,200.00 $
146,000 $ 175,200.00 $
Fixed $1,000 $1,000
$25,000 35,297.69 $
$197,525 171,932.31 $
$223,525 208,230.00 $
$369,525 383,430.00 $
15,156.00 $ #REF! #REF! #REF!
38,880.00 $ #REF! #REF! #REF!
43,200.00 $ #REF! #REF! #REF!
2,880.00 $ #REF! #REF! #REF!
100,116.00 $ #REF! #REF! #REF!
300,000.00 $ 300,000.00 $ 300,000.00 $ 300,000.00 $
300,000.00 $ 300,000.00 $ 300,000.00 $ 300,000.00 $
400,116.00 $ #REF! #REF! #REF!
7,200.00 $ #REF! #REF! #REF!
28,800.00 $ 20,000.00 $ 20,000.00 $ 20,000.00 $
21,600.00 $ #REF! #REF! #REF!
57,600.00 $ #REF! #REF! #REF!
65,520.00 $
- $
87,120.00 $ 60,500.00 $ 60,500.00 $ 60,500.00 $
152,640.00 $
210,240.00 $
$1,000 1,000.00 $ 1,000.00 $ 1,000.00 $
25,000.00 $ 25,000.00 $ 25,000.00 $
206,318.77 $
Percent
Ratio to the
Sales
Income Statement
Net sales 100%
Cost of goods sold 60.1%
Gross profit 39.9%
Selling expense 7.2%
Operating expense 16.4%
Operating profit (EBITDA) 16.4%
Other income (expense) 1.4%
Pretax profit (EBITDA - Total other Income (Expense) 15.0%
Income tax allowance (45%)
Net Profit
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
0 1 2 3 4
20XX 20x1 20x2 20x3 20x4
1,747,698 $ 2,097,237.60 $ 2,516,685.12 $ 3,020,022.14 $ 3,624,026.57 $
1,050,270 $ 1,260,324 $ 1,512,388.80 $ 1,814,866.56 $ 2,177,839.87 $
697,428 $ 836,913.60 $ 1,004,296.32 $ 1,205,155.58 $ 1,446,186.70 $
125,000 $ 151,001.11 $ 181,201.33 $ 217,441.59 $ 260,929.91 $
285,850 $ 343,946.97 $ 412,736.36 $ 495,283.63 $ 594,340.36 $
286,578 $ 341,965.53 $ 410,358.63 $ 492,430.36 $ 590,916.43 $
24,150 $ 29,361.33 $ 35,233.59 $ 42,280.31 $ 50,736.37 $
262,428 $ 312,604.20 $ 375,125.04 $ 450,150.05 $ 540,180.06 $
118,093 $ 140,671.89 $ 168,806.27 $ 202,567.52 $ 243,081.03 $
144,335 $ 171,932.31 $ 206,318.77 $ 247,582.53 $ 297,099.03 $
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
Year
5
20x5
4,348,831.89 $
2,613,407.85 $
1,735,424.04 $
313,115.90 $
713,208.43 $
709,099.72 $
60,883.65 $
648,216.07 $
291,697.23 $
405,135.04 $
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma
Year
0
20XX
Income Statement
Cost of goods sold 1,050,270 $
Gross profit 697,428 $
Selling expense 125,000 $
Operating expense 285,850 $
Operating profit (EBITDA) 286,578 $
Other income (expense) 24,150 $
Pretax profit (EBITDA - Total other Income (Expense) 262,428 $
Income tax allowance (45%) 118,093 $
Net Profit 144,335 $
*Through the expanssion of product line in the market, the sales are expected to grow by 20% every year for the next five years.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Income Statement
Year
0
20XX
Income Statement
Sales 1,750,450 $
Returns and allowances 2752
Net Sales 1,747,698 $
Cost of goods sold 1,050,270 $
Gross profit 697,428 $
Selling expense 125,000 $
Operating expense 285,850 $
Operating profit (EBITDA) 286,578 $
Other income (expense) 24,150 $
Pretax profit (EBITDA - Total other Income (Expense) 262,428 $
Income tax allowance (45%) 118,093 $
Net Profit 144,335 $
*Through the expanssion of product line in the market, the sales are expected to grow by 10% every year for the next five years.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Income Statement
Year
1 2 3 4 5
20X1 20X2 20X3 20X4 20X5
1,260,324 $ 1,512,388.80 $ 1,814,866.56 $ 2,177,839.87 $ 2,613,407.85 $
836,913.60 $ 1,004,296.32 $ 1,205,155.58 $ 1,446,186.70 $ 1,735,424.04 $
150,000.00 $ 180,000.00 $ 216,000.00 $ 259,200.00 $ 311,040.00 $
343,020.00 $ 411,624.00 $ 493,948.80 $ 592,738.56 $ 711,286.27 $
343,893.60 $ 412,672.32 $ 495,206.78 $ 594,248.14 $ 713,097.77 $
28,980.00 $ 34,776.00 $ 41,731.20 $ 50,077.44 $ 60,092.93 $
314,913.60 $ 377,896.32 $ 453,475.58 $ 544,170.70 $ 653,004.84 $
141,711.12 $ 170,053.34 $ 204,064.01 $ 244,876.82 $ 293,852.18 $
173,202.48 $ 207,842.98 $ 249,411.57 $ 299,293.89 $ 359,152.66 $
*Through the expanssion of product line in the market, the sales are expected to grow by 20% every year for the next five years.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Income Statement
Year
1 2 3 4 5
20X1 20X2 20X3 20X4 20X5
1,925,495.0 $ 2,118,044.50 $ 2,329,848.95 $ 2,562,833.85 $ 2,819,117.23 $
3027.2 3329.92 3662.912 4029.2032 4432.12352
1,922,467.8 $ 2,114,714.58 $ 2,326,186.04 $ 2,558,804.64 $ 2,814,685.11 $
1,155,297 $ 1,270,826.70 $ 1,397,909.37 $ 1,537,700.31 $ 1,691,470.34 $
767,170.80 $ 843,887.88 $ 928,276.67 $ 1,021,104.33 $ 1,123,214.77 $
137,500.00 $ 151,250.00 $ 166,375.00 $ 183,012.50 $ 201,313.75 $
314,435.00 $ 345,878.50 $ 380,466.35 $ 418,512.99 $ 460,364.28 $
315,235.80 $ 346,759.38 $ 381,435.32 $ 419,578.85 $ 461,536.73 $
26,565.00 $ 29,221.50 $ 32,143.65 $ 35,358.02 $ 38,893.82 $
288,670.80 $ 317,537.88 $ 349,291.67 $ 384,220.83 $ 422,642.92 $
129,901.86 $ 142,892.05 $ 157,181.25 $ 172,899.38 $ 190,189.31 $
158,768.94 $ 174,645.83 $ 192,110.42 $ 211,321.46 $ 232,453.61 $
*Through the expanssion of product line in the market, the sales are expected to grow by 10% every year for the next five years.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Income Statement
Year
Assets
Fixed assets Fixed
Current Assets
Cash
Inventory
Accounts receivable
Prepaid Expenses
Total Assets
Liabilities and Equity
Current Liability
Accounts Payables
Revolving line of credit Fixed
Total Current Liability
Long-term Liability
Loans payable to stockholders Fixed
Long-term debt and capital leases
Total Long-term Liability
Equity
Common Stock Fixed
Additional Paid -in Capital Assumed
Retained earnings
Reserves
Total Equity
Total Equity and Liabilities
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Balance Sheet
20XX 20X1 20X2 20X3 20X4
300,000 $ 300,000 $ 300,000 $ 300,000 $ 300,000 $
10,525 $ 11,578 $ 12,735 $ 14,009 $ 15,410 $
30,000 $ 33,000 $ 36,300 $ 39,930 $ 43,923 $
27,000 $ 29,700 $ 32,670 $ 35,937 $ 39,531 $
2,000 $ 2,200 $ 2,420 $ 2,662 $ 2,928 $
369,525 $ 376,478 $ 384,125 $ 392,538 $ 401,792 $
20,000 $ 22,000 $ 24,200 $ 26,620 $ 29,282 $
20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $
40,000 $ 42,000 $ 44,200 $ 46,620 $ 49,282 $
60,500 $ 60,500 $ 60,500 $ 60,500 $ 60,500 $
45,500 $ 45,500 $ 45,500 $ 45,500 $ 45,500 $
106,000 $ 106,000 $ 106,000 $ 106,000 $ 106,000 $
1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $
25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $
197,525 $ 158,768.94 $ 174,645.83 $ 192,110.42 $ 211,321.46 $
- $ 43,709.06 $ 33,279.00 $ 21,807.58 $ 9,188 $
223,525 $ 228,478.00 $ 233,925 $ 239,918 $ 246,510 $
369,525 $ 376,478.00 $ 384,125 $ 392,538 $ 401,792 $
The only items affected by the sale percent change in sale are the current assets and liabilities.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Balance Sheet
Year
20X5
300,000 $
16,951 $
48,315 $
43,484 $
3,221 $
411,971 $
32,210 $
20,000 $
52,210 $
60,500 $
45,500 $
106,000 $
1,000 $
20,307 $
232,453.61 $
- $
253,761 $
411,971 $
The only items affected by the sale percent change in sale are the current assets and liabilities.
XYZ Company, INC.
Five Year Projection on 20% increase in sale
Pro Forma Balance Sheet
Year