IPPTChap010 hisrich

8/10/2019 IPPTChap010 hisrich

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2014 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any manner. This document

may not be copied# scanned# duplicated# orwarded# distributed# or posted on a website# in whole or part. 10-2

Learning Objectives

To understand the role of budgets inpreparing pro forma statements

To understand why positive profits canstill result in a negative cash flow

To learn how to prepare monthly pro

forma cash flow income balancesheet and sources and applications offunds statements for the first year ofoperation


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Learning Objectives

To e!plain the application andcalculation of the brea"#even pointfor the new venture

To illustrate the alternative softwarepac"ages that can be used forpreparing financial statements


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Operating and Capital

$udgets %ales budget # &n estimate of thee!pected volume of sales by month 'etermined on the basis of sales

forecasts (anufacturing ventures # Costs of

internal production and subcontracting

are compared )ncludes ending inventory estimation


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Table 10*1 # & %ample(anufacturing $udget for First

Three (onths


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Operating and Capital

$udgets Operating costs Fi!ed e!penses incurred regardless of

sales volume +ariable e!penses must be lin"ed to

strategy in the business plan

Capital budgets # Provide a basis for

evaluating e!penditures


7/20 2014 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any manner. This document

may not be copied# scanned# duplicated# orwarded# distributed# or posted on a website# in whole or part. 10-'

Table 10*, # & %ample Operating$udget for First Three (onths

-.000s/Clic" to edit (aster te!t styles

%econd level Third level

Fourth level Fifth level



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Pro Forma )ncome

%tatements Pro forma income Projects net profit calculated from

projected revenue minus projected costs

and e!penses* %tarts by calculating monthly sales Projects operating e!penses for each of

the months during the first year Projections should be made for years ,

and as well



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Table 10*# (PP Plastics )nc* ProForma )ncome %tatement First 2ear by

(onth -.000s/




Pro Forma Cash Flow

Projected cash available calculated fromprojected cash accumulations minusprojected cash disbursements

3ot the same as profit %ales may not be regarded as cash Profit as a measure of success may be

deceiving if there is significant negative cash

flow Can be projected using the indirect or

direct method


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Table 10*4 #%tatement of CashFlows The )ndirect (ethod


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Table 10*5- (PP Plastics )nc*Pro Forma Cash Flow First 2ear

by (onth -.000s/Clic" to edit (aster te!t styles%econd level

Third level Fourth level

Fifth level


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Pro Forma $alance %heet

%ummari6es the projected assetsliabilities and net worth of the newventure

Consists of &ssets

Liabilities

Owners equity &mount invested and7orretained from the venture operations


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Table 10*8 # (PP Plastics )nc* ProForma $alance %heet 9nd of

First 2ear -.000s/


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$rea"#9ven &nalysis

Breakeven +olume of sales wherethe venture neither ma"es a profitnor incurs a loss

The brea"#even formula

$79-:/ ;


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Figure 10*1 # ?raphic)llustration of $rea"even


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Pro Forma %ources and&pplications of Funds

%ummari6e all the projected sourcesof funds available and how thesefunds will be disbursed

%ources of funds Operations 3ew investments Long#term borrowing %ale of assets


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Pro Forma %ources and&pplications of Funds

@ses )ncrease assets Aetire long#term liabilities Aeduce owner or stoc"holdersB euity Pay dividends


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%oftware Pac"ages

Trac" financial data and generatefinancial statements

Present different scenarios andassess their impact on the pro formastatements

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IPPTChap010 hisrich