Discussion
In this report, we will prepare the pro forma income and balance sheet financial statements for The Boeing Company using the percentage of sales method. The financial statements used in this analysis are included in the appendix section of this report.
The percentage of sales method is a technique used in financial forecasting and is employed by business entities to predict their annual growth of sales and the amount of financing that will be required for the firm's goals to be accomplished. The sales growth is, therefore, key the to this process and has been determined before the preparation of sales forecasts, and proforma financial statements.
The general procedure for preparing Pro-forma financial statements using the percentage of sales method is as follows;
Determine the expected sales growth.
Identify the financial statement accounts that are closely linked to sales e.g. cash, accounts receivable and inventory
Determine the percentage of sales that these account balances represent. For example, if the company had sales of 3,000 and had an inventory balance of 450, the percentage of sales for the inventory account would be (450/3000)% = 15 percent
The changes in the accounts that do not vary with sales are determined by the method the company selects to finance its growth i.e. debt or equity.
The sales forecast is then determined using the formula;
Forecasted Sales = Current sales x (1 + expected sales growth rate/100)
The final step is to calculate the forecasted account balances. The account balances can be computed by multiplying the forecasted sales by the percentage of sales computed earlier.
The Boeing Company has determined that it’s expected five years annual earnings growth is 12.56%. The earnings growth for the financial period 2015 is however expected to be a decrease of -18.83% over last year. Source: http://www.nasdaq.com/symbol/ba/earnings-growth#ixzz4Iy30DyvT.
The sales forecast for the 2016 fiscal period is therefore given by:
Forecasted Sales = Current sales x (1 + expected sales growth rate/100)
= 96,114,000x (1 + -18.83/100) = 78,015,733.8
The rest of the calculations following the steps detailed above is included in the attached excel file.
Conclusions
Pro-forma income statement
The company's gross sales are expected to reduce in the 2016 financial year to a total sales value of $78015733.8 thousand down from gross sales value of $96114000 thousand in the 2015 trading period. We note that cost of revenue constitutes the largest percentage of the company’s costs comprising of 85.4 percent of sales. The company, therefore, makes a gross profit margin of 14.9 percent on these sales. Total operating expenses constitute 6.8 percent of sales. Therefore, the total operating income is 7.7 percent of sales. The net income from continuing operations makes up 5.4 percentage of sales and is thus the income attributable to common shareholders. From the analysis of the pro forma income statement, we can conclude that the company should devise ways to minimise its costs of sales so as to increase its profit margins.
Pro-forma balance sheet
We note that inventory constitutes the largest proportion of sales among current assets making up 49.2 percent of sales. On the side of non-current assets, property plant and equipment represent 12.6 percent of sales. Accounts payable represents the largest proportion of sales among current liabilities making up 51.2 percent of sales while other liabilities constituting 27.5 percent forms the most substantial portion of non-current liabilities. We can, therefore, conclude that the company should closely monitor its working capital management so as to ensure achievement of its objectives.
References
The Boeing Company. (2016). https://finance.yahoo.com/quote/BA/financials?p=BA
Ronald C. Spurga. (2004). Balance Sheet Basics: Financial Management for Nonfinancial Managers. City of Westminster, London: Penguin publishers
Peter M. Bergevin. (2002). Financial Statement Analysis: An Integrated Approach. Upper Saddle River, New Jersey: Prentice Hall Publishers
Appendix
