Pro Forma Financial Statements Research Articles

Financial Feasibility Analysis of XYZ Company Market Expansion Plan to Kalimantan

XYZ Company, a B2B manufacturer of Songkok in Gresik, East Java, plans to expand its market by establishing a new distribution warehouse in Banjarmasin, Kalimantan. This strategy aims to leverage the growing demand for Songkok in Kalimantan, which has a significant Muslim population. The primary goal of this study is to evaluate the financial feasibility of purchasing versus renting the new warehouse for this investment plan. The financial feasibility analysis was conducted in multiple stages. Pro forma financial statements were constructed for both scenarios, incorporating historical data of the company's financial statements, industry benchmarks, and growth assumptions from management interviews. Free Cash Flow to the Firm (FCFF) and terminal cash flows were calculated using the Weighted Average Cost of Capital (WACC). Capital budgeting techniques were then used to evaluate financial feasibility, including Net Present Value (NPV), Internal Rate of Return (IRR), and Discounted Payback Period. Risk assessment was performed through sensitivity analysis and Monte Carlo simulation. Results indicate that the renting scenario, with an initial investment of IDR 242 million, has a higher NPV and IRR than the purchase scenario, which requires an initial investment of IDR 944 million. The renting scenario also offers a faster-discounted payback period of 2 years and one month, making it more feasible. Risk assessment shows moderate risk, with an 83% probability of achieving a positive NPV. The financial feasibility analysis recommends renting the new warehouse in Banjarmasin. This option provides a quicker payback period, higher NPV and IRR, and positive risk assessment results. Investing in this project will enhance XYZ Company's market presence in Kalimantan, cater to the growing demand for Songkok, and achieve sustainable growth and profitability.

Pro-forma Financial Statements of Technology-growth Company

To secure technological and industrial competitiveness, the KOSDAQ market is implementing a technology-growth listing system. In general, such listed companies have been recognized for their technological prowess at the time of listing, but there are few cases where the technology has been commercialized or realized. Nevertheless, the largest shareholder sold their shares after the lock-up period using the listing system to obtain capital gain. A company that utilizes the listing system for the purpose of acquiring such private gain may overestimate the pro-forma profit and loss to evaluate the company value higher than that of a company that did not sell its shares. Therefore, we verified whether the technology-growth listed companies, in which the largest shareholder sold their shares after the lock-up period, overestimate the pro-forma profit and loss compared to those that did not. The analysis revealed that the technology-growth listed companies in which the largest shareholder sold their shares after the lock-up period overestimated the pro-forma net income for the first year compared to the companies that did not.

Design, Manufacturing, and Finance – An Interdisciplinary Approach through Engineering and Business Partnership

This paper presents the guidelines and requirements of interdisciplinary projects run by teams comprised of engineering and business students. The benefits of interdisciplinary projects lie in the ability of students to engage in problem-based learning through the execution of real-life project experiences which, if successful, lead to an increased quality of work. Academically, interdisciplinary projects directly address specific required student outcomes and guiding principles for accreditation of engineering and business schools. Professionally, encountering, understanding, and overcoming the challenges associated with working in interdisciplinary teams allow students to develop critical thinking skills that are highly valued by potential employers. Teams are tasked with identifying an unfulfilled need in the marketplace, designing a product to fill that need, and creating manufacturing and business plans around that product. This includes a complete product design, identification of proper facilities and resources needed, a complete economic and industry analysis of the market in which the business will compete, and the construction of a five-year set of pro forma financial statements, including an appropriate cost of capital. Example projects are highlighted to illustrate the achievement of learning outcomes. In addition to the presentation of the proposed product to the instructors early in the semester, teams also have the opportunity to make their final project presentation to additional faculty and invited members of the local business community for feedback. Students indicated that the concept of design for manufacturing and marketing has proven to be very effective in student learning.

Value Creation and Investment Projects: An Application of Fuzzy Sensitivity Analysis to Project Financing Transactions

This paper presents a methodology which blends sensitivity analysis (SA) and fuzzy arithmetic for managing uncertainty in project financing transactions. Specifically, we adopt the perspective of the equityholders and use the average return on equity (ROE) to measure shareholder value creation and, in particular, the financial efficiency of the equity investment. We cope with uncertainty via global and local SA and fuzzy arithmetic; we use the fuzzy version of the well-known (global) Gamma indicator and we introduce the fuzzy versions of two (local) importance measures, the differential importance measures (DIM). We then apply them to the pro forma financial statements drawn up by the analyst for measuring and ranking the impact of the key accounting parameters on the resulting values and we show how the uncertain accounting and financial magnitudes of the project company affect the financial efficiency. Among the advantages of this analysis, aimed to enhance the managerial insights generated by the financial model and to lead to appropriate managerial actions, we focus on the attractiveness of fuzzy calculus and possibility theory to represent and compute all relevant financial data that appear in project financing and budgeting, where available information is characterized by incompleteness or nonstatistical uncertainty. In this context, fuzzy computing and appropriate SA techniques, based on application of the extension principle, allow complete investigation of the project characteristics.

Excess Value Created as a Performance Metric and its Determination Utilizing the <i>TEVA</i> Measure

The paper explores the excess value created (EVC) metric, which is an aggregated measure of the financial performance of a company over a multi-period measurement interval. The relevance of the study is due to the demand for practical solutions in the field of financial performance monitoring and incentive compensation, which makes it possible to achieve congruence between the interests of shareholders and the decisions of managers. The aim of the study is to build and justify a periodic financial measure that takes into account not only the current result but also the long-term consequences of management decisions. The scientific novelty of the study lies in the determination of the EVC metric via the TEVA indicator and providing the rationale for the new design of the performance measure. The result of the study is the derivation of formulas for calculating the EVC measure on multi-period and one-period intervals, which are free from restrictions on changes in the capital structure and the cost of capital, allow for a time-varying systematic risk of operating activities and possess the advantage of computational simplicity important for practical applications. The study concludes that the measurement of value created using the EVC indicator determined via TEVA makes it possible to achieve close conformity of the metric constructed to the real-world conditions with the unification of calculations in its retrospective and forecast components based on data available from historical and Pro Forma financial statements and information from the capital market.

Post COVID-19 financial distress in Pakistan: Prediction of corporate defaults at Pakistan Stock Exchange

COVID-19 has slowed down the global economic activity. This slowdown is expected to turn into an economic recession, where firms are expected to experience financial distress leading to corporate defaults. Predicting such defaults is important to safeguard the stakeholders’ interest in the financial markets. This study has estimated the extent of financial distress among the firms listed at PSX and constituting KSE 30 index, by using Altman’s Z-Score. The score has been computed using the financial statements of year 2019-20, and on the proforma financial statements for year 2019-20 and 2020-21. These financial years are considered as pre and post COVID-19 closing dates respectively for the financial statements. The proforma financial statements have been drawn for financial year 2019-20 and 2020-21 using established accounting conventions of prudence, conservatism, substance over form, and foreseeable future. The results of Z-score in pre and post COVID-19 have been compared to assess the change in degree of financial distress among the selected firms. A significant increase in the degree of financial distress has been observed, which may lead to an increased number corporate default for the firms listed at PSX. The firms and corporate regulators need to curtail the rate of corporate defaults.

Artisan Flooring Products, Inc

The owner of a small retail flooring company is projecting her company's financial performance and financial position for the current 2020 calendar year. The company began business in 2019, and by all measures, that first year had been a financial success. A small profit was earned, and the year ended in a strong financial position. But disruption caused by the COVID-19 pandemic has caused the need for new planning. A number of changes to business activity are projected, together enabling the construction of pro forma 2020 financial statements. Liquidity, profit, and the ability to take an annual owner's draw could then be assessed.This case is optimally used early in an introductory financial accounting course, or as a stand-alone exercise that illustrates the construction of financial statements. It can also be used as two distinct accounting analyses: (i) students can use the case data to reconstruct the 2019 balance sheet and income statement provided within the case exhibits, and (ii) they can also use the new projections to complete the 2020 pro forma financial statements. Excerpt UVA-C-2445 Dec. 16, 2020 Artisan Flooring Products, Inc. Jenny Zheng had been excited about the prospects for 2020. The previous year, the first for her company, had ended with an unexpected profit. The momentum going into the new year was strong. But by late February, it was clear that 2020 would be nothing like anyone had expected. The early stages of the COVID-19 pandemic had squashed demand, and Zheng found herself juggling potential government loan access and regulations, possible employee layoffs, and ever-changing local and national medical guidelines. Scenario planning around this new reality took on critical importance. The Company Artisan Floor Products, Inc. (AFP), was a retail flooring company serving do-it-yourself (DIY) consumers and professional flooring installers. It specialized in stone plastic composite (SPC), laminate, and glue-down vinyl flooring in a variety of lengths and colors. The most popular with customers was its SPC simulated wood grain finishes in either brown or gray. AFP did not install flooring, but rather sold ready-to-install products and supplies. . . .

Valuing Initial Public Offerings Using Article 11 Pro Forma Financial Information in the Prospectus*

ABSTRACTWe investigate whether Article 11 pro forma financial information assists investors in valuing IPOs. While the SEC expects it to be helpful in assisting investment decisions, Article 11 pro forma financial information is based on registrants' understanding and assumptions, and registrants can exercise their own judgment when preparing pro forma financial statements. It is therefore an empirical question whether the information contained in pro forma financial statements is useful to investors. We examine the association between pro forma adjustments of earnings and book value of equity and the IPO offer value and find asymmetric results. While positive pro forma adjustments of earnings and book value of equity are positively associated with the IPO offer value, negative pro forma adjustments of earnings and book value of equity are negatively associated with the IPO offer value, suggesting that negative pro forma adjustments are priced as growth opportunities. Additional analyses reveal that the association between pro forma adjustments of book value of equity and the IPO offer value varies across different time periods and industries and that pro forma adjustments of book value of equity are initially mispriced by investors. In contrast, we do not find similar results for pro forma adjustments of earnings. Further empirical tests show that the asymmetric results of mispricing of pro forma adjustments of earnings and book value of equity may be explained by the requirements of Article 11 of Regulation S‐X for pro forma adjustments dictating that adjustments to earnings reflect only recurring items while adjustments to book value reflect both recurring and nonrecurring items.

Utilising SATA in Measuring Students’ Understanding of Financial Statements: A Survey among Non-Accounting Students

Accounting is perceived as a complicated process due to its technical difficulties. However, accounting knowledge is undeniable essential to complete a business plan. The ‘Simplified Accounting Template for Apprentice’ (SATA) is developed to facilitate students especially non-accounting students who have very little accounting knowledge in preparing proforma financial statements at the financial section in the business plan. SATA act as integral part of technology used in accounting education to improve students’ understanding on accounting and help them to complete the business plan. The objective of this paper is to access the level of students’ understanding on accounting with the introduction of SATA in teaching and learning which finally can assist them to prepare financial statements. A hands-on workshop was conducted by accounting lecturers in UiTM Malacca Branch Jasin Campus on SATA to assist the students in completing the business plan for financial section. A questionnaire was given at the end of the workshop to the students to gather their feedback related on SATA and give their perceptions using SATA in preparing financial statements. This study found that more than 80% respondents admitted that SATA improved their understanding on accounting terms such as terms of non-current assets, non-current liabilities, sales, purchases, 85% agreed that SATA took lesser time to prepare financial statements, 90% found that SATA was very easy to use as compared to manually prepared the financial statements and facilitates in analyzing financial performance and 91% agreed that SATA really help them in completing their business plan particularly in financial section. On overall most of respondents admitted that SATA increase their understanding in preparing financial statements. This study also revealed that most of the respondents understand the component of Statement of Profit or Loss and Statement of Financial Position embedded in SATA.

Corporate Disclosure and Capital Markets

Corporate disclosures are critical for functioning of capital markets demanding financial information. Firms provide disclosures through structured and regulated reports, including financial statements, disclosure notes, management recommendations, other compliance filings. In addition, firms voluntarily communicate their proforma financial statements and business data arising from forecasts or corporate reports prepared for investors. Lastly, there are certain disclosures demanded by financial and market intermediaries, industry experts and media. This paper introduces questions and empirical methods that are pertinent to capital markets research in accounting (hereinafter, CMRA). In section II, the literature review is discussed. Forces giving rise to demand for disclosures in modern capital-market economy, and the institutions increasing the credibility of disclosures are addressed. In the same section, I inform about the main research topics used for studying of financial reporting and disclosures associated with capital markets. I use the disclosure framework to identify research questions within each topic. Empirical evidence and research methodology related with CMRA are reviewed in section III. Section IV discusses reflections on constraints of studying financial reporting issues and their impact on capital markets. Previous studies in CMRA documented disclosures associated with stock performance, bid-ask spreads, transactions, cost of capital, analyst coverage, executive compensation and institutional ownership (Healy, P. et al. 2001). Also, section IV evaluates the previous studies falling short due to endogeneity and measurement error problems and complicating the interpretation of research findings. This paper will aid potential researchers in identification of many open, i.e. unanswered, questions in the CMRA field. Section V summarizes the main ideas, methodology and desired results for the research. Finally, section VI lists bibliography used for the references.

Leaning Tower of Pizza: A Business Start‐up

AbstractThe following take‐out pizzeria restaurant simulation highlights the information sources that an entrepreneur can use to prepare a cash budget and financial forecast for a new business venture. Based on the information contained in this simulation, students make a capital budgeting decision and prepare pro forma financial statements.

SEC Comment Letters on Form S-4 and M&A Accounting Quality

Prior research on SEC comment letters has almost exclusively focused on reviews of periodic filings, such as 10-Ks. Transactional filing reviews, such as those related to mergers and acquisitions (M&A), are a fundamental priority of the SEC and to which it dedicates significant resources. We help fill the void in the literature by examining the influence of SEC comment letters on one type of transactional filing, Form S-4, on the accounting quality of the newly merged entity. We find that S-4s that receive an SEC comment letter are less likely to have a restatement or a goodwill impairment after the M&A deal is completed. Our inferences remain the same using either an entropy-balanced sample or a propensity-score-matched sample based on firm and deal characteristics. These results are stronger for S-4 comment letters with higher intensity and M&A- specific comments. Finally, to explore plausible mechanisms and provide further context, we examine specific disclosure changes in S-4 amendments filed during the filing review process and find evidence that the improved M&A accounting quality is related to revisions to the pro forma financial statements and the total purchase price. Overall, our findings provide evidence on the effectiveness of the SEC’s comment letter process related to M&A deals.

The long-term viability of U.S. wine grape vineyards: Assessing vineyard labour costs for future technology development

The motivation for this study centres on the labour-and cost-intensive nature of wine grape production and the potential opportunities for robotic technology. The objectives of this study are to develop cost of production budgets for five representative wine grape vineyards in four US states, assess the economic viability of wine grape production under current operating conditions, evaluate labour costs by production task, and identify common production challenges and tasks that could be augmented with robotic technology development. Investigators have worked with grower panels to develop a production budget for representative vineyards in four states, and to gather input on production tasks that the growers and technology developers feel would be most suitable for robotic technology. A stochastic simulation model was developed to assess baseline pro-forma financial statements for each vineyard size. Combined, the results help in exploring opportunities to strengthen vineyard profitability and competitiveness using robotics.

The long-term viability of US wine grape vineyards: assessing vineyard labour costs for future technology development

The motivation for this study centres on the labour-and cost-intensive nature of wine grape production and the potential opportunities for robotic technology. The objectives of this study are to develop cost of production budgets for five representative wine grape vineyards in four US states, assess the economic viability of wine grape production under current operating conditions, evaluate labour costs by production task, and identify common production challenges and tasks that could be augmented with robotic technology development. Investigators have worked with grower panels to develop a production budget for representative vineyards in four states, and to gather input on production tasks that the growers and technology developers feel would be most suitable for robotic technology. A stochastic simulation model was developed to assess baseline pro-forma financial statements for each vineyard size. Combined, the results help in exploring opportunities to strengthen vineyard profitability and competitiveness using robotics.

Charge pricing model for electric vehicle charging infrastructure public-private partnership projects in China: A system dynamics analysis

The design of charge price is essential to the financial viability of electric vehicle charging infrastructure public-private partnerships (EVCI-PPPs). This study proposes a system dynamics (SD) technique to develop a charge pricing model based on pro forma financial statements developed during the feasibility study period. Pricing parameters are first identified. A charge pricing model using the SD approach is then developed based on charge pricing parameters. This charge price not only ensures charge operators gain the anticipated minimum attractive return of rate, but also not exceed the government-regulated price. Subsequently, an ongoing EVCI-PPP project in Anqing is selected to verify the applicability and effectiveness of the model proposed in this study. Sensitivity analysis results indicate that operating costs, electricity price, and charge volume are the main determinants of feasible charge price. Several suggestions to improve charge operators' profits and reduce charge price, including increasing charge volume, negotiating with power companies for preferential electricity price, broadening profit channels, and improving operational capabilities, are put forward. This research framework can also be used as reference to study other infrastructure's pricing models.

Valuing IPOs Using Article 11 Pro Forma Financial Information in the Prospectus

We investigate whether Article 11 pro forma financial information assists investors in valuing IPOs. While the SEC expects it to be helpful in assisting investment decisions, Article 11 pro forma financial information is based on registrants’ understanding and assumptions and registrants can exercise their own judgement when preparing pro forma financial statements. It is therefore an empirical question whether the information contained in pro forma financial statements is useful to investors. We examine the association between pro forma adjustments of earnings and book value of equity and the IPO offer value and find asymmetric results. While positive pro forma adjustments of earnings and book value of equity are positively associated with the IPO offer value, negative pro forma adjustments of earnings and book value of equity are negatively associated with the IPO offer value, suggesting that negative pro forma adjustments are priced as growth opportunities. Additional analyses reveal that the association between pro forma adjustments of book value of equity and the IPO offer value varies across different time periods and industries and that pro forma adjustments of book value of equity are initially mispriced by investors. In contrast, we do not find similar results for pro forma adjustments of earnings. Further empirical tests show that the asymmetric results of mispricing of pro forma adjustments of earnings and book value of equity may be explained by the requirements of Article 11 of Regulation S-X for pro forma adjustments dictating that adjustments to earnings reflect only recurring items while adjustments to book value reflect both recurring and nonrecurring items.

MGM Mirage

A senior analyst has recently completed an on-site visit to the Las Vegas properties of MGM Mirage. She must value the enterprise after her preparation of projected financial statements. Assumptions for these statements come from a combination of standard account relations delineated in the case and from specific company projections that must be gleaned from MGM's MD&A. This case introduces students to pro forma financial statements and their relevance to cash flow and earnings-based valuation. Tools relevant to spreadsheet modeling can also be introduced. The case precedes MGM's announced acquisition of Mandalay Bay Corporation in 2004.

The Study on the Usefulness of the Pro Forma Financial Statements of Backdoor Listing Firms

시장 진입방법에는 크게 신규상장과 우회상장이 있다. 일반적인 시장진입 방법인 신규상장은 신규투자자를 보호하기 위해 상장절차가 까다로우며 상장규정이 엄격하지만, 우회상장은 상장기업의 기존주주와 비상장기업의 주주간의 거래이기 때문에 신규상장에 비해 상장절차 및 상장규정이 엄격하지 않다.BR 가장 일반적인 주식 시장진입 수단으로 신규상장 방법이 있음에도 불구하고 규제기관이 우회상장을 허용하고 있는 이유는 시장을 활성화하기 위해서이다. 하지만 비상장기업의 대주주들이 사적이익을 추구하기 위한 방편으로 우회상장을 악용하고 있는 경우가 많아지면서 이로 인한 피해를 선의의 소액투자자들이 받고 있다. 따라서 규제당국은 우회상장의 부정적 측면을 해소하고 시장의 활성화를 위해 관련 규정을 지속적으로 개정하고 있다.BR 규제당국은 2006년 6월 ‘우회상장 규제강화조치’를 통해 상장요건, 감독기능, 그리고 공시기능을 강화하였다. 특히 상장 후 2년간 우회상장으로 흡수한 비상장사업부문의 재무예측수치와 실적수치를 별도로 구분하여 사업보고서에 공시하도록 하였다. 이는 과거 실적치 및 재무예측치를 바탕으로 가치평가를 하는 비상장주식의 특성상 주식의 과대평가로 인해 우회 상장기업에 투자한 일반 투자자의 피해를 최소화하기 위해 마련된 제도이다.BR 선행연구 중 2006년에 시행된 ‘우회상장 규제강화조치’의 효과성을 검증한 연구는 최성호와 최관(2014)이 있다. 그들은 2006년 규제강화조치 이전에 우회상장한 기업과 이후에 우회상장한 비상장기업간의 상장 전 이익의 질이 차이가 나타나는지를 검증한 결과, 규제강화조치 시행이전과 이후에 우회상장한 기업간 상장 전 이익의 질은 유의한 차이가 나타나지 않았다고 보고하였다.BR 본 연구는 2006년 6월 ‘우회상장기업 규제강화조치’중 공시강화의 효과성을 검증하였다. 이를 검증하기 위해 추정손익의 과대 혹은 과소예측에 대해서 외부이해관계자들이 차별적으로 인지하는지를 분석하였다.BR 분석결과, 당기순이익을 비롯하여 매출액 및 영업이익에 대해서 우회상장 비상장기업의 추정손익정보가 실적손익정보에 비해 낙관적으로 예측될수록 자기자본비용은 유의하게 증가하였다. 즉, 자본시장참여자들은 추정손익정보의 과대예측에 대해 부정적으로 인지하였다. 둘째, 추정손익정보의 정확성이 낮아질수록 투자자들은 투자의사결정시 부정적으로 인지하는 것으로 나타났다. 셋째, 추정손익을 과대예측한 기업을 대상으로 가설을 재검증한 결과, 주요가설검증결과와 질적으로 차이가 없었다.BR 최근 SPAC(기업인수목적회사)을 통한 우회상장이 주목받고 있다. 우회상장을 통한 시장 활성화를 기대하고 있는 시점에서 향후 우회상장기업에 투자하는 선의의 일반 투자자의 이익이 보호되기 위한 제도 마련시 본 연구결과가 도움이 될 것이라 생각된다.

Comment on SEC Release No. 33-9929, Effectiveness of Financial Disclosures About Entities Other than the Registrant

This letter comments on the SEC’s proposals to improve disclosure effectiveness by altering the requirements of Regulation S-X. In particular, the letter asserts that the practice of requiring the use of pro forma financial statements under Rule 3-05 should be altered in a manner that makes the financials more effective. This could be done by allowing management to make greater use of assumptions and estimates in developing the pro forma financial statements, thereby providing shareholders with an analysis of the acquisition as seen “through the eyes of management.”

An Average-Based Accounting Approach to Capital Asset Investments: The Case of Project Finance

Literature and textbooks on capital budgeting endorse net present value (NPV) and generally treat accounting rates of return as not being reliable tools. This paper shows that accounting numbers can be reconciled with NPV and fruitfully employed in real-life applications. Focusing on project finance transactions, an average return on investment (AROI) is drawn from the pro forma financial statements, obtained as the ratio of aggregate income to aggregate book value. We show that such a metric correctly captures a project's economic profitability, as long as it is compared with a comprehensive weighted average cost of capital (WACC) that includes a correction factor that takes account of the capital foregone by the investors. In contrast to the internal rate of return, AROI is unique, and we provide an explicit functional relation that links it to the NPV. The approach holds for levered and unlevered projects, constant and non-constant leverage ratios, and constant and non-constant WACCs.