Principles of Managerial Finance, 15th Edition

4.4 Profit Planning: Pro Forma Statements

1. LG5

Whereas cash planning focuses on forecasting cash flows, profit planning has a broader emphasis that encapsulates the firm’s overall financial position. Shareholders, creditors, and the firm’s management pay close attention to pro forma statements, which are projected income statements and balance sheets. Firms construct pro forma financial statements by studying past relationships between key accounts on the income statement and balance sheet and making judgments about whether those relationships will continue in the near future. Many of the financial ratios introduced earlier in this text play an important role in the creation of pro forma financial statements.

Managers require two main inputs ...