Question

Suppose you are creating pro forma statements. Your sales forecast for next year is $5 million. Explain how you make forecasting on 1) direct costs (COGS), 2) depreciation expenses, 3) inventory, and 4) retained earnings. For each item, explain how you determine the multiplier (if needed), what information you need, and what steps you must take in your forecasting.

Answer 1

Cost of goods sold would be calculated as percentage of increase in sales. This mean cost of goods sold would increase in same proportion to increase in sales next year

In this case the current cost of goods sold and percentage increase in sales next year would be required. Cost of goods sold would be current year cost of goods sold multiplied by (1+percentage increase in sales)

Depreciation expense does not generally increase with sales however at times company may forecast to increase depreciation in ratio of increase in net sales.

Alternatively, depreciation expense for next year would be kept at same amount or calculated as percentage of property, plant and equipment.

This would require information related to how depreciation is to be kept for next year. Depreciation amount would depend on the method used to calculate pro-forma depreciation

Inventory is dependent on sales and thus would increase in proportion to increase in sales next year

This would require details on current year inventory and the percentage increase in sales revenue. Inventory would be calculated as current year inventory multiplied by (1+percentage increase in sales)

Retained earnings for next year would be calculated as beginning retained earnings balance plus pro forma net income less dividend paid during next year

Thus, information needed would be beginning retained earnings balance, calculate pro forma net income and dividend payout for the forecast period