Pier 1 Assignment: ProForma Financial Statements

Percentage-of-Sales Method

Develop 2008 - 2010 pro forma income statements and balance sheets using the 2007 financial information and the information below.

Deliverables-- if collected, you will need to hand in the following in hard copy:

1. Excel: 2008 – 2010 Pro forma income statements and balance sheets

2. Answer to the summary question

  1. Project the company’s sales

Projections / Next Year / Two Years / Three Years
Annual % change in sales / 20% / 7% / 5%
  1. Project operational (e.g., cost of goods sold, SGA) expenses using the common-size income statement including various margin analysis. Suggestion: Forecast Gross Profit Margin to determine COGS and Gross Profit.

Projections / Next Year / Two Years / Three Years
Gross Profit Margin / 45% / 46.5% / 44.0%
Store Occupancy as a % of Sales / 20% / 20% / 22%
SGA as a % of Sales / 41% / 40% / 43%
Depr. & Amort. as a % of Sales / 3% / 3% / 2.5%
  1. Estimate the level of investment in inventory and receivables using the appropriate asset utilization ratios. Project the payables using Average Payment Period (days).

Projections / Next Year / Two Years / Three Years
Inventory Turnover or Average Age of Inventory (determines inventory) / 154 average age of inventory / 154 / 156
Average Collection Period (determines accounts receivable) / 5 / 5 / 5
  1. Project the level of property plant and equipment

Projections / Next Year / Two Years / Three Years
Property Plant and Equipment / 20% / 7% / 5%
  1. Forecast interest expense

Projections / Next Year / Two Years / Three Years
Interest Expense / $11,730 / $11,730 / $11,730
  1. Project short-term and long-term debt exclusive of any new financing

Projections / Next Year / Two Years / Three Years
Average Payment Period (determines accounts payable) / 34 / 34 / 34
ST Debt / 0 / 0 / 0
LT Debt / $184,000 / $184,000 / $184,000
  1. Adjust any miscellaneous balance sheet and income statement items

Use the same numbers we used in class. However, if the company is profitable (i.e., earnings before taxes is positive), assume the company’s income taxes will be 20% of earnings before taxes.

  1. Adjust Equity (exclusive of buying back shares or issuing additional stock) based on net income and forecasted dividends (assume dividends = $0).
  1. “Force” Cash Balance

At this step, it is OK to have a negative cash balance. Of course, a company should never have a negative cash balance. With pro forma financial statements, a negative cash balance means the company may need additional financing.

  1. Determine financing needs—DO NOT COPLETE

SUMMARY QUESTION

Compare and contrast the proforma financial statements prepared in class with the proforma financial statements prepared for this assignment. Note: Length—one paragraph