Selected Companies Pro Forma

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 5 (1255 words) Published: August 25, 2008
Selected Companies Pro Forma
Apple has become very successful in the technology industry. The company has increased its net sales from 2006 to 2007, which proves they are making good capital budgeting decisions. A pro forma income statement and balance sheet showing the future planning and growth of a company. The pro forma income statement and balance sheet will explain a cash budget, underlying assumptions of calculations, calculations of different ratio analysis, and make recommendations to management. “The most comprehensive means of financial forecasting is to develop a series of pro forma, or projected, financial statements” (2005, Block & Hirt, p. 88, chap. 4). Financial Statements

A set of financial statements include an income statement and balance sheet for the upcoming year. These financial statements use percent-of-sales method assuming sales for Apple have increased by 15%. “A systems approach is necessary to develop pro forma statements. We first construct a pro forma income statement based on sales projections and the production plan, then translate this material into a cash budget, and finally assimilate all previously developed material into a pro forma balance sheet” (2005, Block & Hirt, p. 88, chap. 4). Income Statement Pro Forma

2007% of sales2008
Net sales (Increase by 15%)$24,006 27,607
Cost of sales15,85266.0%18,230
Gross margin 8,1549,377
Operating expenses:
Research and development 7823.3%899
Selling, general, and administrative 2,96312.3%3,407
Total operating expenses 3,7454,307
Operating income4,4095,070
Other income and expense5992.5%689
Income before provision for income taxes5,0085,759
Provision for income taxes (calculated on income before tax)1,51230.2%1,739 Net income$3,496 4,020

Balance Sheet Pro Forma

2007% of sales2008
Current assets:
Cash and cash equivalents$9,352 39.0%10,755
Short-term investments 6,03425.1%6,939
Accounts receivable, less allowances1,6376.8%1,883
Inventories 3461.4% 398
Deferred tax assets 7823.3%899
Other current assets 3,80515.9%4,376
Total current assets 21,95625,249
Property, plant, and equipment, net 1,8327.6%2,107
Goodwill (does not change with sales, taken the same)3838 Acquired intangible assets, net (same value is retained)299299 Other assets1,2225.1%1,405
Total assets$25,34729,099

Current liabilities:
Accounts payable (adjusted to balance the balance sheet)$4,97020.7%3,825 Accrued expenses 4,32918.0%4,978
Total current liabilities9,2998,803
Non-current liabilities 1,5166.3%1,743
Total liabilities 10,81510,546
Commitments and contingencies
Shareholders’ equity:
Common stock (will not change with assets)5,3685,368
Retained earnings (increases with net income for 2008)9,10113,121 Accumulated other comprehensive income (taken at same level)6363 Total shareholders’ equity 14,53218,552
Total liabilities and shareholders’ equity $25,34729,099

Cash Budget Assumptions
A cash budget shows cash receipts and cash disbursements. “The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding at the end of each month” (2005, Block & Hirt, p. 95, chap. 4). For cash receipts, we need to know the collection pattern of how sales are collected. For cash disbursements, we need to know whether expenses are paid in cash as incurred or are they paid later. In addition, we also need to know if any capital expenditures will be made and any other expense that is not in the income statement. We also need to know how cash shortfall, if it is there, will be met. Underlying Assumptions

In the percentage of sales method, we first calculate the percentage of sales in the current year. Given the sales of the coming year, the same percentage applies to all the expenses. In the same way, balance sheet...
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