[MUSIC PLAYING] Hi, this is Dr. Bob Nolley with a lesson on the pro forma balance sheet. As we mentioned in our last lesson, our sales forecast drives the pro forma income statement. Our pro forma balance sheet will capture the impact of those changes.
You'll recall that we wanted to find the AFN-- the additional funds needed. Our pro forma balance sheet will show us the effects of our revenue and expense projections and how the organization chooses to finance them. A pro forma balance sheet will require us to forecast our current assets, including cash accounts, receivable, inventory, fixed assets like property plant and equipment and intangible assets will also have to be forecast.
So the starting point for the forecast for each of these items is usually a percentage of sales using the same percentage as the prior accounting period. All of these can be adjusted. For example, accounts receivable may need to be additionally adjusted due to changes in the credit policy. Inventory may change due to changes in inventory management practices. Or even the content of inventory if new products are offered or new product lines are rolled out.
The forecast of liabilities also begins with the same percentage as sales, as in the previous accounting period. Adjustments will be made here to accommodate changes and policies, such as vendor payments or other accounts payable issues, and if any additional funds are needed or financing is required through current liabilities, like short-term borrowing.
Finally, the equity section will be adjusted to accommodate any changes in the issuance of common stock. In the end, the equity will be adjusted to balance the balance sheet so that assets equal liabilities plus owners equity. Let's take a look at the example for Layla's Cafe.
On her balance sheet, she projects total current assets of $1,300,000, property plant and equipment of $150,000. Her total assets will be $1,420,000. Her current liabilities will total $520,000. She will take on some short-term debt of $200,000 to finance the additional cash she needs. Her long-term liabilities remain the same. And her total equity is $200,000. So the balance sheet balances at $1,420,000.
The planning process that they'll go through involves a ratio analysis on both the pro forma statements. This allows the company to examine the impact of their strategic in the financial statement changes its planning to make. It allows them to examine the earnings per share, the return on assets, the projected return on equity, and ensure that these ratios still align with the projected growth goals.
In review, the pro forma balance sheet will project assets, liabilities, and equity changes that are required from the changes in the pro forma income statement in the next period. There is a planning process. And it involves a ratio analysis to make sure all the decisions that are being made will keep the performance of the organization in line with the strategic plan.
This is Dr. Bob Nolley. And I'll see you in the next lesson.