I understand that non-recurring items such as adjustments for changes in accounting methods, extraordinary gains/losses, income from discontinued operations, etc. must not be included. However, what items should I address? I would like to establish the estimate for a firm over a three-year period but I'm not sure where to start and the text I'm using is not very concise. Any guidance would be greatly appreciated!
Okay, let's step back for a moment and determine what we are trying to accomplish. If we are interested in forecasting revenue, then the PRO FORMA INCOME STATEMENT is a great place to start, and here's why based upon the format of the statement. The Income Statement measures the performance of the firm OVER a period of time. And it does this by measuring income, expenses, and other items which will finally affect the net amount which the firm can expect based upon the best estimate of performance for a specific period of time.
Sales (for the pro forma statement we will estimate performance based either upon units sold or actual sales - usually on an annual
basis for a specific period of time)
Less: Cost of Goods Sold (represented by the cost of inventory we maintain for the operational cycle)
Equals: Gross Profit/Margin (excess of revenue before ...
Business firms will generally forecast future revenue based upon the % of sales method, resulting in a discounted cash flow realization for the firm. Decisions can then be made regarding long term investing through the use of this type of forecasting model. This represents a primer and beginning of forecasting future sales for decision making.