Pro Forma Financial Statements Dr. Nancy Mangold California State University, East Bay

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


Projecting Operating Expenses Cost of Goods Sold Selling and Administrative Expenses Net Income Before Interest and Taxes


Project Assets Cash Accounts Receivable Inventories Other Current Assets Investments Fixed Assets Other Assets


Project Liabilities and Contributed Capital Accounts Payable Notes Payable Other Current Liabilities Long-Term Debt Other Liabilities Contributed Capital


Project Retained Earnings Retained Earnings


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


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


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


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


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%


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%


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


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


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


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


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


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


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


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


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


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


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


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

Documents

Pro Forma Financial Statements Dr. Nancy Mangold California State University, East Bay