FORECASTING FINANCIAL STATEMENTS: PROFORMA ANALYSIS

Roger Clarke and Grant McQueen

August 2001

ABSTRACT

This teaching note explains why and how managers project financial statements into the future. The note is designed for an introduction to corporate finance class. The note prepares students for either a case such as Clarkson Lumber or a real-word project in which proforma statements are needed. This note explains how to build a proforma balance sheet and intentionally does not include a complete proforma income statement so that the students will have to demonstrate some ingenuity when doing the follow-on case or project. The note is a nice supplement to both the advance and remedial corporate finance text books. The more advanced books (e.g., Ross, Westerfield, and Jaffe) typically give short shrift to the topic of forecasting and the more remedial text books (e.g., Block and Hirt) typically build the forecasted statements presupposing the manager knows production projections (e.g. the type, number, and price of units to be bought, produced, and sold).

Roger Clark is with Analytic-TSA Global Asset Management and an Adjunct Professor in the Marriott School at Brigham Young University. Grant McQueen is the William Edwards Professor of Finance in the Marriott School at Brigham Young University. The authors thank colleges at BYU and ASU and the research assistance and students for their contributions. Send correspondence to Grant McQueen, 671 TNRB, Marriott School, Brigham Young University, Provo UT 84602. email: grant_mcqueen@byu.edu.

FORECASTING FINANCIAL STATEMENTS: PROFORMA ANALYSIS

I INTRODUCTION

Forecasting a firm's financial statements can help both financial managers and general managers. Proforma statements help the financial manager plan the firm's financial needs. With an estimate of future income