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Preparation of Projected
Financial Statements
Lesson 3.3
1
Business Finance
Accountancy, Business, and Management

"What do you want to
become in the future?"
2

You will be asked this
question at every stage in
your life. Some business
people aspire to become the
CEO of a billion-dollar
company. Others want the
fulﬁllment of serving their
communities as social
entrepreneurs.
3

4
How about you?
How do you see yourself ten
years from now?

Businesses have
mission, vision, and
goals. Every decision,
action, and activity
must contribute
toward achieving
these.
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Every functional area of
business—marketing,
finance, production, human
resources—must contribute
in concrete terms. One of
the ways to concretize
financial goals is to create
projected financial
statements.

Learning Competency
Illustrate the formula and format for the preparation of
budgets and projected ﬁnancial statements
(ABM_BF12-IIIc-d-11).
7

Learning Objectives
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At the end of this lesson, you should be able to do the following:
● Define financial projection.
● Apply the process in preparing the projected financial
statements.
● Prepare projected financial statements such as income
statements and balance sheets.

9
How are budgets relevant to the
preparation of projected financial
statements?

Financial statements are reports that summarize a
company's financial position, performance, and cash flow for
a given period. They typically include the balance sheet,
income statement, and cash flow statement. Financial
statements provide insights into a company's financial health
and can be used to make decisions about investing, lending,
and other financial activities.
Financial Statements: A Review
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Statement of
Comprehensive Income
a financial statement that
summarizes the company's
operating results over a
specific time period
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1
2
3
Financial Statements: A Review
Statement of Financial
Position
a concise account of a
company's financial
situation at a specific point
in time
Statement of Cash
Flows
a financial statement that
provides a snapshot of a
company's cash inflows and
outflows over a period of
time

A projected financial statement presents a forecast of a
company's future financial performance. Projected financial
statements are typically used by businesses to ensure that
operating decisions contribute to strategic objectives.
Projected financial statements are also sometimes referred to
as financial forecasts, financial model, or pro forma financials.
Projected Financial Statements
12

Several different methods are used to create projected
financial statements. These include:
1. extrapolating from past financial performance. This
approach uses historical data to project future financial
performance.
2. analyzing the market. This approach looks at trends in
the overall market to project future financial
performance.
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● analyzing from the bottom up. This approach starts with
individual assumptions about each component of revenue
and expense. These components are then aggregated to
project future ﬁnancial performance.
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Check Your Progress
Describe the difference between financial statements and
projected financial statements in terms of purpose.
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1
Answer area

This lesson will illustrate how projected ﬁnancial statements
are created using the following case and its corresponding
assumptions.
The president of XYZ Corporation instructed the company’s
ﬁnancial manager to prepare the 2022 Projected Financial
Statements before 2021 ends. These statements should be
based on the results of the recent board meeting, which
enumerated the following assumptions for the year 2022:
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17
Accounts Assumptions
Expected increase in sales (from
2021 to 2022)
10%
Accounts such as cost of sales,
cash, account receivable,
inventories, current assets, and
account payables
will vary with sales based on the 2021 sales level
Variable operating expenses 6% of sales
Depreciation expense of
property, plant, and equipment
(PPE)
12% of gross beginning balance of PPE:
● December 31, 2021 gross PPE balance:
₱31,000,000
● New PPE to be acquired for 2022: ₱4,000,000

18
Past Liabilities and Obligations Two loans with annual interest rate of 11%:
● Loan 1: Remaining principal balance of ₱2,250,000
(to be paid on June 30, 2022).
● Loan 2: Amounting to ₱3,000,000 incurred in
December 31,2021. The principal balance is paid
with ₱500,000 every June 30 and December 31.
Additional liabilities and
obligations for 2022
A new loan of ₱3,500,000 with an expected annual
interest rate of 11% will be incurred in December 31,
2022, payable at the rate of ₱500,000 every June 30
and December 31.
Other accounts (noncurrent
assets and other current
liabilities)
No change

19
Income tax rate 30% of income before taxes
● 70% to be paid in 2022
● 30% will be paid in 2023
Total cash dividends ₱1,800,000

Profit planning estimates the income and financial
performance of the company based on sales forecasts. It is
different from cash budgeting, wherein forecasting focuses on
cash flows. A firm’s profit plan is communicated through the
projected income statement and balance sheet.
Projected Income Statement
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There are two important inputs in proﬁt planning: the
ﬁnancial statements of the previous year and the sales
forecast for the coming year. A simple way to prepare a
projected income statement is through the percent-of-sales
method, which expresses the various income statement items
as percentages of projected sales (Gitman and Zutter 2012).
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The procedure consist of two steps:
● Step 1: Calculate the items on the previous year’s income
statement as percentage of that year’s sales to get the
percent of sales.
● Step 2: Using the percent of sales value of the previous
year, calculate the projected income statement items for
the coming year based on the sales forecast.
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To simplify, the following formula can be used:
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Percentage of Sales % = (Income Statement item ÷ Sales) × 100%
Projected Income Statement Item = Sales Forecast × Percentage of
Sales %

However, it is important to note that a firm’s expenses can be
fixed or variable. Thus, it is better to differentiate the fixed
and variable expenses, so the percent-of-sales method will
only be used for variable expenses.
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Closer Look
Based on the illustrative example, prepare the projected
income statement of the XYZ Corporation for the year 2022.
25

Closer Look
Solution:
(a) Projected Net Sales 2022
= Net Sales 2021 + (Net Sales 2021 × 10%)
= ₱65,800,000 + (₱65,800,000 × 10%)
= ₱72,380,000
26

Closer Look
(b) Projected Cost of Sales 2022
= (Cost of sales 2021 ÷ Net Sales 2021) × 100%
= (36,190,000 ÷ 65,800,000) × 100%
= 55% (Since the cost of sales in 2021 is 55% of the Net sales of the same
year, the projected cost of sales for 2022 will be 55% of the net sales in
2022 as well.)
= Net Sales 2022 × 55%
= ₱39,809,000
27

Closer Look
(c) Projected Operating Expenses 2022
= Variable (6% × Net Sales 2022) + Depreciation Expense
(₱35,000,000 × 12%)
= ₱4,342,800 + ₱4,200,000
= ₱8,542,800
28

Closer Look
(d) Projected Interest Expense 2022
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Closer Look
Answer:
30

Check Your Progress
Why does the percent-of-sales approach of pro forma
income statement preparation fail when ﬁxed costs are
present?
31
2
Answer area

The projected financial position of a company is
communicated through the projected balance sheet. A simple
method in preparing a projected balance sheet is through the
judgemental approach, wherein the firm projects the values
of balance sheet accounts and uses external financing to bring
them to balance (Gitman and Zutter 2012).
Projected Balance Sheet
32

Essentially, the ﬁrm will estimate how much external
ﬁnancing it needs to support the forecasted level of
operations and sales. The external funds needed (EFN) is
computed using the formula below:
33
EFN = Change in Total Assets – (Change in Total Liabilities + Total Change in
Equity)

A positive external funds needed value indicates that, based
on current plans, the company will not be able to generate
enough internal ﬁnance to support its expected asset growth.
A negative result for external funds needed suggests that the
company will generate more ﬁnance internally than it
requires to support its expected asset growth.
34

Closer Look
Based on the illustrative example and provided the projected
income statement (Example 1), prepare the projected balance
sheet of the XYZ Corporation for the year 2022.
35

Closer Look
Step 1: Calculate the projected amounts for individual items.
Projected Cash 2022
= (Cash 2021 ÷ Net Sales 2021) × Net Sales 2022
= (₱2,125,054 ÷ ₱65,800,000) × ₱72,380,000
= ₱2,337,559.40
36

Closer Look
Projected Accounts Receivable 2022
= (Accounts Receivable 2021 ÷ Net Sales 2021) × Net Sales 2022
= (₱4,601,000 ÷ ₱65,800,000) × ₱72,380,000
= ₱5,061,100
37

Closer Look
Projected Inventories 2022
= (Inventories 2021 ÷ Net Sales 2021) × Net Sales 2022
= (₱9,698,608 ÷ ₱65,800,000) × ₱72,380,000
= ₱10,668,469
38

Closer Look
Projected Other Current Assets 2022
= (Other Current Assets 2021 ÷ Net Sales 2021) × Net Sales 2022
= (₱2,100,000 ÷ ₱65,800,000) × ₱72,380,000
= ₱2,310,000
39

Closer Look
Projected Property, Plant, and Equipment 2022
= (PPE 2021 + New PPE 2022) - [(gross balance 2022 + new PPE
2022) × Depreciation Expense percent 2022]
= (₱24,400,000 + ₱4,000,000) - [(₱31,000,000 + ₱4,000,000) × 12%
= ₱24,200,000
40

Closer Look
Projected Accounts Payable 2022
= (accounts payable 2021 ÷ Net Sales 2021) × Net Sales 2022
= (₱10,101,620 ÷ ₱65,800,000) × ₱72,380,000
= ₱11,111,782
41

Closer Look
Projected Current Portion of Long-term Debt and Long-term
Debt Total
42
Loan Current Portion Long-term Total
₱3,000,000 incurred on
December 31, 2021
₱1,000,000 ₱1,000,000 ₱2,000,000
₱3,500,000 to be incurred
on December 31, 2022
₱1,000,000 ₱2,500,000 ₱3,500,000
Total ₱2,000,000 ₱3,500,000 ₱5,500,000

Closer Look
Projected Retained Earnings 2022
= (Retained Earnings 2021 + Net Income 2022) - Cash Dividends
= (₱8,957,118 + ₱16,521,365) - ₱1,800,000
= ₱23,678,483
43

Closer Look
Step 2: Calculate the External Funding Needed (EFN). It would
be easier to calculate the changes in speciﬁc accounts if you
prepare a Balance Sheet for 2021 and the Projected Balance
Sheet for 2022.
44

Closer Look
45

Closer Look
46
You will observe that the
amounts for Total Assets
and the Total Liabilities
and Stockholders’ Equity
for 2022 do not balance
because the amount for
External Funds Needed
(EFN) is not yet included.

Closer Look
External Funds Needed (EFN) 2022
= Change in Total Assets - (Change in Total Liabilities + Total
Change in Stockholders’ Equity)
= 1,652,466.20 – (5,752,159.00 + 14,721,365.00)
= –18,821,057.80
47

Closer Look
Step 3: Prepare the Projected Balance Sheet including the
EFN.
48

Check Your Progress
What is the signiﬁcance of the external funds needed?
49
3
Answer area

A projected cash flow statement is used to assess cash
inflows and outflows in order to forecast when, how much,
and for how long cash deficits or surpluses will exist for a
business in the future. This data can subsequently be utilized
to substantiate loan requests, calculate payback schedules,
and make short-term investment decisions.
Projected Statement of Cash Flow
50

Closer Look
Using the prepared projected income statement and balance of
the XYZ Corporation for the year 2022, prepare the company’s
projected cash ﬂow statement.
Projected Cash Flow Statement
51

Closer Look
Answer:
Projected Cash Flow Statement
52

Case Study
The preparation of pro forma financial statements and a
thorough financial analysis is an important part of business
planning. The work's complexity can cause users to become
overwhelmed. They may also struggle to link financial analysis
aspects in a consistent and meaningful way in order to create
excellent analysis. Frustrated users may give up or get
expensive expert aid to finish the analysis. These expenses
make use of scarce resources that would otherwise be
required to start or grow a business.
Developing Pro Forma Financial Statements
53
Terrance Jalbert, A Management Focused Tool for Developing Pro Forma Financial Statements,” International Journal of
Management and Marketing Research (2019),
http://www.theibfr2.com/RePEc/ibf/ijmmre/ijmmr-v12n1-2019/IJMMR-V12N1-2019-5.pdf, last accessed on April 15 2022.

Case Study
Jalbert (2017) creates a technique for anticipating ﬁnancial
statements. Forecasted ﬁnancial statements, a capital budget,
company value calculations, and ratio analysis are all included
in the template. The template is highly automated, and users
simply need to provide management variables.
54

Case Study
The template makes extensive use of automation to ensure
calculation correctness. Skeptical bankers may be reassured by
this high level of accuracy. The method does not necessitate
the use of plug-ﬁgures. Rather, each variable's calculation is
supported. Furthermore, the spreadsheet avoids creating
circular references, which has been a concern with prior
techniques.
55

Keep in Mind
56
● Projected financial statements show the estimates of a company's
future financial performance, position, and cash flow. They are
essential tools for businesses to assess risk, allocate resources, and
plan for growth. Projected financial statements are typically based on
past performance and current trends.
● A Projected Income Statement or Statement of Comprehensive
Income shows the projected revenue and expenses. A simple
approach to creating one is through the percent-of-sales approach,
which expresses the various income statement items as percentages
of projected sales

Keep in Mind
57
● A Projected Balance Sheet or Statement of Financial Position shows
the projected assets and liabilities. It can be used to estimate a
company's financial stability. A simple way of creating one is through
the judgmental approach, where the external funds needed (EFN) are
calculated to bring the accounts to balance.
● A Projected Statement of Cash Flow shows the projected cash inflows
and outflows. It can be used to estimate a company's ability to
generate cash.

Try This
Fill in the Blanks. Fill in the missing words to make the statements
correct.
1. The proﬁt plan of a company is presented through
________________________ and projected balance sheet.
59
Answer area

Try This
correct.
2. The percent-of-sales approach is a simple way to prepare a
projected ﬁnancial statement. It expresses the income
statements as percentages of ________________________.
60
Answer area

Try This
correct.
3. A simple way to prepare a projected balance sheet is
through the judgmental approach, wherein the values are
projected and the ________________________ to bring the
accounts to balance are determined.
61
Answer area

Try This
correct.
4. A ________________________ is used to assess the cash inflow
and outflow to forecast when, how much, and for how long
cash deficits or surpluses will exist in the future.
62
Answer area

Try This
correct.
5. A ________________________ communicates the projected
ﬁnancial position of a company in the future on a speciﬁc
period.
63
Answer area

Practice Your Skills
Preparing Projected Financial Statements
Help Company ABC determine
if they will have excess cash or
need additional funds. The
company's Balance Sheet and
Income Statement for the year
ending in December 31, 2022
are provided below. The
assumptions for the following
year, 2023, are also provided.
64

Preparing
Projected
Financial
Statements
65

66
Expected increase in sales
(from 2022 to 2023)
10%
Accounts such as cost of sales,
cash, account receivable,
inventories, current assets, and
account payables
will vary with sales based on the 2021 sales level
Variable operating expenses 7% of sales
Depreciation expense of
property, plant, and equipment
(PPE)
12% of gross beginning balance of PPE:
● December 31, 2022 gross PPE balance:
₱33,000,000
● New PPE to be acquired for 2023: ₱4,000,000

67
Past Liabilities and Obligations Two loans with annual interest rate of 10%:
● Loan 1: Remaining principal balance of
₱1,250,000 (to be paid on June 30, 2022).
● Loan 2: Amounting to ₱3,000,000 incurred in
December 31,2021. The principal balance is
paid with ₱1,000,000 every June 30 and
December 31.
Additional liabilities and
obligations for 2022
A new loan of ₱3,000,000 with an expected annual
interest rate of 8% will be incurred on December 31,
2022, payable at the rate of ₱1,000,000 every June 30
and December 31.

68
Other accounts (noncurrent
assets and other current
liabilities)
No change
Income tax rate 30% of income before taxes
● 70% to be paid in 2023
● 30% will be paid in 2024
Total cash dividends ₱2,000,000

Do the following tasks.
1. Prepare a Statement of Projected Financial Position.
69
Answer area

2. Prepare a Statement of Projected Comprehensive Income.
70
Answer area

3. Prepare a Statement of Projected Cash Flows.
71
Answer area

Challenge Yourself
Answer the following questions:
What ﬁnancial analysis can forecast the possible trend of the
company's performance based on the current and projected
ﬁnancial statements?
72
Answer area

Challenge Yourself
Projected ﬁnancial statements are often used by businesses to
plan for future growth and expansion. They can also be used to
assess the feasibility of new projects or investments. How do
projected ﬁnancial statements help businesses make decisions
about future growth and expansion?
73
Answer area

Challenge Yourself
Projected financial statements are financial statements that
represent a company's expected future financial performance.
They are typically used by businesses to make strategic
decisions and assess opportunities for growth. In relation to
this, what relevant information do projected financial
statements provide?
74
Answer area

Photo Credits
Slide 1: Future by CreditScoreGeek.com is licensed under CC BY 2.0 via Flickr.
Slide 3: Doors by Arek Socha is licensed under Pixabay License via Pixabay.
Slide 4: Report by Mohamed Hassan is licensed under Pixabay License via Pixabay.
Slide 5: Thinking by Mohamed Hassan is licensed under Pixabay License via Pixabay.
Slide 6: Achievement by Mediamodiﬁer is licensed under Pixabay License via Pixabay.
Slide 7: Search by Mohamed Hassan is licensed under Pixabay License via Pixabay.
75

Bibliography
Gitman, Lawrence, and Chad Zutter. 2012. Principles of Managerial Finance 13th Edition. Prentice Hall.
http://www.mim.ac.mw/books/Principles-of-Managerial-Finance-13th-Edition_Full.pdf.9Ukgy8w1RYp7U1dls6CxR
LDn1i8aezIq.
McLaney, Eddie. 2009. Business Finance Theory and Practice 8th Edition. Financial Times Prentice Hall.
https://dut.edu.ua/uploads/l_1872_56653010.pdf.
Melicher, Ronald, and Edgar Norton. 2017. Introduction to Finance 16th Edition. John Wiley & Sons, Inc.
https://askmm.net/wp-content/uploads/2021/04/Introduction-to-Finance-by-Ronald-W.-Melicher-Edgar-A.-Nort
on.pdf.
76

Bibliography
Quiry, Pascal, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi, and Pierre Vernimmen. 2005. Corporate Finance: Theory
and Practice. John Wiley & Sons Ltd.
http://www.untag-smd.ac.id/ﬁles/Perpustakaan_Digital_1/FINANCE%20Corporate%20Finance%20Theory%20an
d%20Practice.pdf.
Smart, Scott, Lawrence Gitman, and Michael Joehnk. 2016. Fundamentals of Investing 13th Edition. Pearson Education
Limited.
https://www.scribd.com/document/527749687/Gitman-Michael-Scott-Fundamentals-of-Investing-Global-Edition
-13e.
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