Pro Forma Income Statement and Balance Sheet - Essay Example

Finance & Accounting al Affiliation) Pro forma ments The percentage of sales approach to financial forecasting is based on the assumption that most income statement and balance sheet accounts vary with sales. For that reason, the key component of this approach is the sales forecast, which is essential in the construction of pro-forma financial statement and helps in identification of a firms needs for external financing. This paper applies and discusses the percentage of sales method to financial forecasting for the financial statements of Garmin, Inc.

Constructing Pro forma StatementsThe first step is to express the Balance Sheet and Income Statement accounts which vary directly with Sales as percentages of Sales. This is done by dividing the balance for these accounts by sales revenue for 2013. The Balance Sheet accounts, which generally vary closely with Sales are cash, inventory, accounts payable, and accounts receivable. Fixed Assets are also often tied closely to Sales, unless there is excess capacity. On the Income Statement, costs are expressed as a percentage of Sales.

Since we are assuming that all costs remain at a fixed percentage of Sales, net Income can be expressed as a percentage of sales indicating the profit margin. Taxes are expressed as a percentage of taxable income to determine the tax rate. Percentages of Sales calculationsCashCash/sales0.45Accounts ReceivableAccounts receivable/salesInventoryInventory/sales0.15Accounts PayableAccounts payable/sales0.06Cost of goods soldCost of goods sold/sales0.47S,A&G CostsS,A&G Costs/sales0.32TaxesTaxes/taxable income0.

06Net IncomeNet income/sales0.23Partial Pro formaThe next step is constructing the Partial Pro-forma Financial Statements. The first step involves determining the forecast sales level for the company. One plus the forecasted growth rate in Sales multiplied by the sales for the year 2013 yields the sales forecast for 2014. The following formula explains this step. To obtain the growth rate, we compare the sales level of 2013 to the sales level of 2011 and 2012. There was a 1.6% drop in sales from 2011 to 2012.

In 2013, the drop in sales was 3.1%. the average drop in sales for the two year period was 2.35%. therefore, the forecasted sales level for 2014 will be;S1= S0(1 + g) = $2,631,851(1 - .0235) = $2,570,003Where S1 = the forecasted Sales level, S0 = the current Sales level, and g = the forecasted growth rate in Sales.After determining the sales forecast, the income statement and balance sheet accounts that vary directly with Sales are determined by multiplying the percentages by the Sales forecast.

The accounts that do not vary directly with Sales are transferred to the Partial Pro-Forma Financial Statements without adjustments.External Financing NeededThe last step of constructing the pro forma financial statements is determining the external finance needed. External finance needed is the difference between partial pro-forma total assets and partial pro-forma total liabilities and owners equity. The amount for Garmin Ltd is 4887221-4879603 = 7618.Pro forma financial StatementFirms can choose to raise the external finance needed by borrowing on short-term basis, issuing stock, or borrowing on a long-term basis.

Garmin Ltd will raise the external finance needed through borrowing on long-term basis. This is captured in the balance sheet by an increase in long-term debts.