3. A new issue of shares will produce net proceeds of N1,000 in 2002. 4. Sales will increase by 12% in 2002 bringing a corresponding increase in accounts receivable 5. Net income in 2002 is forecast to be N954 6. The dividend payout rate is estimated to be 5% of net income The process for solving this problem is: a. Calculate the values of the assets and liabilities where you have the data to do it. b. Determine the value of the line of credit (LOC) based upon the balance sheet equation. The calculations under @ are as follows: Debtors = 1.12 x 1,500 = 1,680 Fixed Assets = 2001 balance + capital expenditure in 2002 –amortization in 2002 = 7,500 + 0- 500 = 7,500 Shares = shares at 2001 + net proceeds of new shares = 1,000 = 2,000 Dividend = net income x dividend rate = 954 x 0.5 = 477 Retained Earnings for 2002 = retained earnings for 2011 + net income for 2002 – dividend = 5,500 +954 (net income) - 477 (dividend) = 5,977 At this point we complete the blanks for the 2002 column as follows: PRO FORMA BALANC SHEET 2001 2002 Debtors 1,500 1,680 Fixed Assets 7,500 7,000 Total Assets 9,000 8,680 Creditors 2,500 ?
70 Shares 1,000 2,000 Retained Earnings 5,000 5,977 Total liabilities and Equities 9,000 ? Applying balance sheet equation LOC = Total Assets – shares – retained earnings = 8, 680 – 2,000 – 5,977 = 703 We then add liabilities to equity = 703 + 2,000 + 5,9777 = 8,680, which equals the assets total. We can then go back to completed the missing number in the balance sheet to achieve the finished result below. PRO FORMA BALANC SHEET 2001 2002 Debtors 1,500 1,680 Fixed Assets 7,500 7,000 Total Assets 9,000 8,680 Creditors 2,500 703 Shares 1,000 2,000 Retained Earnings 5,000 5,977 Total liabilities and Equities 9,000 8,680 It is important to note that judgment needs to be used throughout the preparation of your financial forecast. Historical data and ratios are not always an indication of what the future hold. Therefore, when preparing financial forecast, you should assess the impact of expected future events on the historical results before simply applying the historical rates. Self-Assessment Exercise 1. Under the judgmental approach for developing a pro forma balance sheet, the ‘plug’ figure required to bring the statement into balance may be called the ? 2. The most common cash disbursement are? 4.0 CONCLUSION
71 In this unit, we have discussed that the percentage of sales method is a simplistic approach to preparing pro forma income statement. It is used in a modified manner where the historic percentage of sales is the default estimation if better information is not available while a judgmental approach is used for the preparation of pro forma balance sheet each line item on the balance sheet is assessed individually rather than a blanket approach applied to all items 5.0 SUMMARY We have in this unit given an insight of how, financial statement projections can be created. We have also explained how estimates could be used in the preparation of income statement and balance sheet. We concluded that the simplistic method is the best approach for preparing pro forma income statement while judgment approach is best used for preparing pro forma balance sheet.
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