2. The most comprehensive means for doing financial planning is through the development of pro forma financial statements: pro forma income statement, the cash budget, and the pro forma balance sheet.

A. Pro Forma Income Statement: A projection of how much profit a firm will make over a specific time period

1. Establish a sales projection

2. Determine production needs, cost of goods sold, and gross profits based on the sales forecast

a. Determine units to be produced

Projected unit sales

Desired ending inventory

- Beginning inventory

Production requirements

b. Determine the cost of producing the units

(1) Unit cost = materials + labor + overhead

(2) Total costs = number of units to be produced unit cost

c. Compute cost of goods sold

(1) Estimate unit sales

(2) Cost of goods sold (C.O.G.S) = unit sales X unit cost (FIFO)

d. Compute gross profit = Revenue C.O.G.S.

e. Determine value of ending inventory = begging inventory + total production cost - C.O.G.S.

3. Compute other expenses

a. General and administrative

b. Interest expense FIN202 Instructor: Yudan Zheng

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4. Finally construct the pro forma income statement

Sales revenue

-Cost of goods sold

Gross profit

-General and administrative expenses

Operating profit

-Interest expense

Earnings before taxes

-Taxes

Earnings after taxes

-Common stock dividends

Increase in retained earnings