Pro Forma Balance Sheets
A pro forma balance sheet is similar to a historical balance sheet, but it represents a future projection. Pro forma balance sheets are used to project how the business will be managing its assets in the future. For example, a pro forma balance sheet can quickly show the projected relative amount of money tied up in receivables, inventory, and equipment. It can also be used to project the overall financial soundness of the company. For example, a pro forma balance sheet can help quickly pinpoint a high debt-to-equity ratio.
Pro forma current assets
To obtain your company’s estimated cash position, you need to do a careful cash flow projection. Let’s assume that the projected cash flow for a company called Bright Lawn, or the anticipated funds in Bright Lawn’s checking account on December 31, 1999, will be $50,000.
• Pro forma accounts receivable
To estimate the accounts receivable on December 31, you need to take into consideration the average collection time of receivables and the sales projections for prior periods. For example, let’s assume that Bright Lawn receives payment thirty days after services are performed.
So, in this case, we need to look at the projected sales for December, which are $70,000. Because it takes thirty days to collect payment, we would expect to have all of December’s billings outstanding on December 31. Bright Lawn’s account receivables would be estimated at $70,000.
• Pro forma total current assets
Pro forma total current assets are determined by adding projected cash and projected accounts receivable.
Pro forma fixed assets
• Pro forma land
• Pro forma buildings
Buildings do depreciate. Let’s assume we are depreciating the building over thirty years. Bright Lawn bought its building for $300,000. Each year the building will depreciate by $10,000. By December 31, 1999, the building will be three years old, so the total depreciation will be $30,000. This will be reflected later in the accumulated depreciation total. Under the building heading we show the original value of the asset or $300,000.
• Pro forma vehicles
Vehicles also depreciate. They depreciate over a much shorter period of time than do buildings. Let’s assume we are depreciating Bright Lawn’s truck over a seven-year period. The truck was purchased for $73,500 on January 1, 1999. So, each year the truck will depreciate by $10,500. On December 31, 1999, after one year of depreciation, the truck will have an accumulated depreciation of $10,500.
• Pro forma mortgage note payable
The size of a pro forma mortgage note payable is calculated by taking the mortgage note payable at the end of the current year and subtracting the principal, not interest, payments that will be made during the upcoming year. To obtain that portion of the mortgage that will be classified as a long-term liability, you need to subtract what is classified as current liability. In Bright Lawn’s case, $15,000 is subtracted from the current remaining principal payments of $200,000. Therefore, the long-term portion of Bright Lawn’s pro forma mortgage note payable is $185,000.
• Pro forma total liabilities
Pro forma total liabilities are determined by adding up current and long-term liabilities. Bright Lawn’s pro forma total liabilities are $240,000.
Pro forma owners’ equity
• Pro forma common stock
The common stock portion of the owners’ equity will not change from year to year unless new stock is issued.
• Pro forma retained earnings
Pro forma retained earnings can be tricky to determine. They are the last item to be calculated on a pro forma balance sheet.
Total assets must balance the total liabilities and owners’ equity. In Bright Lawn’s case, we already know that the total pro forma liabilities must total $483,000.
Also, total liabilities added to total owners’ equity must equal total liabilities and owners’ equity. So, you can determine total owners’ equity by subtracting total liabilities from total liabilities and owners’ equity.
Common stock added to retained earnings must equal total owners’ equity. So, by subtracting common stock from total owners’ equity, retained earnings can be determined. This completes a pro forma balance sheet.