Section A Top-Level Planning and Analysis Analysis of Pro Forma Financial Statements Developing the forecast is only the beginning. The pro forma financial statements that result need to be analyzed to determine whether the firms forecasted financial situation meets the firms targets. If it does not, then changes will be needed, not just to the forecast but to the operating plans that resulted in the forecast, and the pro forma statements will need to be done again. Part of the analysis is an analysis of financial ratios. Ratio analysis is used to compare the firms actual ratios and prOjected ratios with target ratios as well as the latest industry average ratios. Here are the ratios we will use to analyze ABCs pro forma financial statements. Although average balances for balance sheet items are preferable for financial statement analysis when relating an income item to a balance sheet item, if averages are not available, it is acceptable to use ending balances. Forthis purpose, we will be comparing ratios for year-end 2009 with ratios for forecasted year-end 2010 and 2009 year-end industry averages. Since averages are not available for the industry, we will use all year-end balances to be consistent. Current ratio: Inventory turnover: Days sales in inventory Accounts receivable turnover: Days sales in receivables: Interest coverage ratio Asset turnover: Debt to equity ratio: Gross profit margin: Net profit margin: Return on assets: Return on equity: 1 Net income = Net income before preferred dividends Total current assets, Total current liabilities Annual cost of sales, Inventory 365 ,Inventory turnover OR Average inventory , (Cost of goods sold, 365) Annual credit sales Accounts receivable 365 , Accounts receivable turnover OR Average Accounts receivable, (Annual credit sales 365) EBIT , Interest expense Net sales Total assets Total liabilities, Total equity Gross profit Net sales Net income Net income Net income , Net sales , Total assets , Total equity
Posted on: Tue, 11 Mar 2014 06:24:08 +0000
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