Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 119

TABLE 3.12 Vectra Manufacturing’s Income

Statement for the Year Ended

December 31, 2003

Sales revenue

Model X (1,000 units at $20/unit) $20,000

Model Y (2,000 units at $40/unit)  (^8)  (^0) , (^0)  (^0)  (^0) 
Total sales $100,000
Less: Cost of goods sold
Labor $28,500
Material A 8,000
Material B 5,500
Overhead  (^3)  (^8) , (^0)  (^0)  (^0) 
Total cost of goods sold  (^8)  (^0) , (^0)  (^0)  (^0) 
Gross profits $ 20,000
Less: Operating expenses  (^1)  (^0) , (^0)  (^0)  (^0) 
Operating profits $ 10,000
Less: Interest expense  (^1) , (^0)  (^0)  (^0) 
Net profits before taxes $ 9,000
Less: Taxes (0.15$9,000)  (^1) , (^3)  (^5)  (^0) 
Net profits after taxes $ 7,650
Less: Common stock dividends  (^4) , (^0)  (^0)  (^0) 
To retained earnings $

3

,

6

5

0

Hint A key point in under-
standing pro forma statements
is that they reflect the goals and
objectives of the firm for the
planning period. In order for
these goals and objectives to be
achieved, operational plans
will have to be developed. Fi-
nancial plans can be realized
only if the correct actions are
implemented.
ance sheets. The basic steps in the short-term financial planning process were
shown in the flow diagram of Figure 3.2. Various approaches for estimating the
pro forma statements are based on the belief that the financial relationships
reflected in the firm’s past financial statements will not change in the coming
period. The commonly used simplified approaches are presented in subsequent
discussions.
Two inputs are required for preparing pro forma statements: (1) financial
statements for the preceding year and (2) the sales forecast for the coming year. A
variety of assumptions must also be made. The company that we will use to illus-
trate the simplified approaches to pro forma preparation is Vectra Manufactur-
ing, which manufactures and sells one product. It has two basic product mod-
els—X and Y—which are produced by the same process but require different
amounts of raw material and labor.
Preceding Year’s Financial Statements
The income statement for the firm’s 2003 operations is given in Table 3.12. It
indicates that Vectra had sales of $100,000, total cost of goods sold of $80,000,
net profits before taxes of $9,000, and net profits after taxes of $7,650. The firm
paid $4,000 in cash dividends, leaving $3,650 to be transferred to retained earn-
ings. The firm’s balance sheet for 2003 is given in Table 3.13.