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This method assumes that the future relationship between various elements of costs to sales will be similar
to their historical relationship. When using this method, a decision has to be taken about which historical
cost ratios to be used. Should these ratios pertain to the previous year, or the average of two or more
previous years?
Under percentage of sales method we assume that all elements of costs and expenses bore a strictly
proportional relationship to sales. The budgeted expenses method, on the other hand, calls for estimating
the value of each item on the basis of expected development in the future period for which the pro forma
profit and loss account is being prepared.
500 560
Total
ASSETS
Non-current Assets
240 270
Fixed assets
7 8
Non-current investments
20 18
Long term loans and advances
Current assets
Current investments 3 2
Inventories 125 144
Trade receivables 80 90
Cash & Cash equivalents 5 6
Short term loans and advances 20 22
Total 500 560
Prepare the Proforma income statement for yr.3 & the Proforma balance sheet as at the end of yr.3,
based on the following assumptions:
a) The projected sales for the yr.3 are 850
b) The forecast values for the following profit & loss account items may be derived using the
percentage of sales method (for this purpose assumes that the average of the percentages for
yr.1 & yr.2 is applicable).
Material expenses
Employees benefit expenses
Finance costs
Other expenses and exceptional items
c) The forecast values for the other items of the profit & loss account are as follows:
Depreciation: 45
Tax: 50% of earnings before tax
Dividends: 16
d) The forecast values of various balance sheet items may be derived as follows:
Fixed assets (net) budgeted at 300.
Non-investments no change over year 2
Current assets are % of sales method wherein the % are based on the average for the
previous two years.
Miscellaneous expenditures are expected to be reduced to 5 and losses.
Share capital no change over year 2
Reserves and surplus: Proforma profit and losses
Non-current liabilities and current liabilities are % of sales method wherein the % are
liabilities & provisions based on average for the previous two years.
External fund required: balancing item.
Problem No.2
Required:
Problem No. 3
The Balance Sheet of Pradhan Company at the end of year 2000, which is just over, is given below:
Share capital 50 Fixed assets 130
Retained earnings 60 Inventories 90
Tern loan 80 Receivables 80
Short term bank borrowings 60 Cash 20
Accounts payable 50
Provisions 20
Total 320 Total 320
The sales for the year ended were 400. The expected sales for the year 2001 are 500. The profit
margin is 5% and the DP ratio is 50%.
Required:
Assume that the company wants to tap EFR in the following order: Short term laon, Long term loan
and additional equity issue.