Strategic Audit.

 

 

What is a Pro Forma Income Statement?
It is a prediction of how the income statement figures would look like for the next five years for the firm you have chosen for the capstone. As in any financial prediction, it depends on assumptions. Assumptions are key to determining how the future would look like.

How to Create a Pro Forma Income Statement?
Section VI of your Strategic Audit includes three strategic alternatives, generally known as stability, growth, and retrenchment. You need to build a pro forma for each of those strategic alternatives, so need to have three different sets of assumptions for each alternative.
The easiest prediction assumes the near past will repeat into the near future. In other words, what happened financially in the previous five years will replicate into the next five years. This is the extreme case of stability, and all future income statement variables are assumed to evolve based on the averages of the last five years.

These assumptions are very strong, and in that sense, maybe very non-realistic. However, it is very easy to calculate, because you just need to know the average of the last five years. If costs went up 5% on average during the last five years, you assume costs will also go up 5% per year in the next five years.

Assumptions for growth and retrenchment strategic alternatives cannot be based on averages of past performance. Growth and retrenchment want clearly to differentiate from the past. You may start by looking at the averages of the ‘stable no strategy’ scenario, and from there to modify the assumptions for growth and retrenchment.

How to use TemplateSA-EXH8-ProForma and 5-Y Financials
The TemplateSA-EXH8-ProForma.xlsx can be downloaded from the attachments here and is a good reference to see how assumptions determine income statement items for the five years in the future, and how the common ratio percentages are calculated for those years too.

That template does not show how the averages were calculated because it does not include the Income Statement date from the last five years. Your 5-Y financials Excel workbook has that information, and the sheet named ‘Pro-Forma no strategy’ has the average formulas connected to the real information. After reviewing it and understanding all the formulas for the first year, copy/paste for the following four years. Do the same with the Common Size Percentages.

To create the Pro-Forma Growth, right-click on the sheet name Pro-Forma No Strategy (bottom of Excel screen) and copy it. Then, rename the copy as Pro-Forma Growth. All the formulas would work, but you must change the assumptions to fit the new growth strategy alternative.

To create the Pro-Forma Retrenchment, follow the same steps mentioned before.

Sample Solution

ken where evil doesn’t outweigh the possible benefits (Begby et al (2006b), Page 325).’ This is further supported by Frowe who explains it is lawful to unintentionally kill, whenever the combatant has full knowledge of his actions and seeks to complete his aim, but it would come at a cost. However, this does not hide the fact the unintended still killed innocent people, showing immorality in their actions. Thus, it depends again on proportionality as Thomson argues (Frowe (2011), Page 141).
This leads to question of what qualifies to be a combatant, and whether it is lawful to kill each other as combatants. Combatants are people who are involved directly or indirectly with the war and it is lawful to kill ‘to shelter the innocent from harm…punish evildoers (Begby et al (2006b), Page 290).However, as mentioned above civilian cannot be harmed, showing combatants as the only legitimate targets, another condition of jus in bello, as ‘we may not use the sword against those who have not harmed us (Begby et al (2006b), Page 314).’ In addition, Frowe suggested combatants must be identified as combatants, to avoid the presence of guerrilla warfare which can end up in a higher death count, for example, the Vietnam War. Moreover, he argued they must be part of the army, bear arms and apply to the rules of jus in bello. (Frowe (2011), Page 101-3). This suggests Frowe seeks a fair, just war between two participants avoiding non-combatant deaths, but wouldn’t this lead to higher death rate for combatants, as both sides have relatively equal chance to win since both use similar tactics? Nevertheless, arguably Frowe will argue that combatant can lawfully kill each other, showing this is just, which is also supported by Vittola, who states: ‘it is lawful to draw the sword and use it against malefactors (Begby et al (2006b), Page 309).’
In addition, Vittola expresses the extent of military tactics used, but never reaches a conclusion whether it’s lawful or not to proceed these actions, as he constantly found a middle ground, where it can be lawful to do such things but never always (Begby et al (2006b), Page 326-31). This is supported by Frowe, who measures the legitimate tactics according to proportionality and military necessity. It depends on the magnitude of how much damage done to one another, in order to judge the actions after a war. For example, one cannot simply nuke the terrorist groups throughout the middle-east, because it is not only proportional, it will damage the whole population, an unintended consequence. More importantly, the soldiers must have the right intention in what they are going to achieve, sacrificing the costs to their actions. For example: if soldiers want to execute all prisoners of war, they must do it for the right intention and for a just cause, proportional to the harm done to them. This is supported by Vittola: ‘not always lawful to execute all combatants…we must take account… scale of the injury inflicted by the enemy.’ This is further supported by Frowe approach

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