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Are Pro Forma Statements part of financial analysis?

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Proforma financial statements should be the companies best estimates on how the company will perform in future periods. They should be part of the overall analytical process, but should not be the only information that the someone would base their decision.

What are your thoughts?

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Pro-forma financial statements can be an effective tool for management because the format will synthesize the thoughts and plans of upper management as well as middle management, department heads and others. In that regard, it is a participatory exercise that can then be used for accountability of managers. Variance analysis later can be very helpful for management to understand what went wrong as well as what went right.

First it forces the managers to carefully plan ahead beginning with a sales forecast and ending with expected expenses. Once planned, the pro-forma statement ...

Solution Summary

In a 363 word solution, the reponse carefully explains several uses for pro-forma statements including other reports which should be prepared as part of the package of forecasted data.

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Pro-forma income statement & financial ratios analysis

Pro-forma income statement & financial ratios

Calcor Company has been a wholesale distributor of automobile parts for domestic automakers for
20 years. Calcor has suffered through the recent slump in the domestic auto industry, and its performance
has not rebounded to the levels of the industry as a whole.

Calcor's single-step income statement for the year ended November 30, 2008, follows:

CALCOR COMPANY
Income Statement
For the Year Ended November 30, 2008 (thousands omitted)
Net sales $8,400
Expenses:
Cost of goods sold 6,300
Selling expense 780
Administrative expense 900
Interest expense 140
Total 8,120
Income before income taxes 280
Income taxes 112
Net income $ 168

Calcor's return on sales before interest and taxes was 5% in fiscal 2008 compared to the industry average
of 9%. Calcor's turnover of average assets of four times per year and return on average assets before
interest and taxes of 20% are both well below the industry average.

Joe Kuhn, president of Calcor, wishes to improve these ratios and raise them nearer to the industry
averages. He established the following goals for Calcor Company for fiscal 2009:

Return on sales before interest and taxes 8%
Turnover of average assets 5 times per year
Return on average assets before interest and taxes 30%

For fiscal 2009, Kuhn and the rest of Calcor's management team are considering the following actions,
which they expect will improve profitability and result in a 5% increase in unit sales:

1. Increase selling prices 10%.
2. Increase advertising by $420,000 and hold all other selling and administrative expenses at fiscal
2008 levels.
3. Improve customer service by increasing average current assets (inventory and accounts receivable)
by a total of $300,000, and hold all other assets at fiscal 2008 levels.
4. Finance the additional assets at an annual interest rate of 10% and hold all other interest expense
at fiscal 2008 levels.
5. Improve the quality of products carried; this will increase the units of goods sold by 4%.
6. Calcor's 2009 effective income tax rate is expected to be 40%?the same as in fiscal 2008.

1. Prepare a single-step pro forma income statement for Calcor Company for the year ended November 30, 2009, assuming that Calcor's planned actions would be carried out, and that a 5% increase in unit sales would be realized.

2. Calculate the following ratios for Calcor Company for the 2008-2009 fiscal year:
a. Return on sales before interest and taxes.
b. Turnover of average assets.
c. Return on average assets before interest and taxes.

3. Based on the ratio calculations, discuss whether or not Kuhn's goals would be achieved.

4. Discuss whether or not it would be possible for Calcor Company to achieve the first two (2) of Kuhn's goals without achieving his third goal of 30% return on average assets before interest and taxes.

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