Corporate Accounting and Financial Management · Forecasting Financial Statements

Forecasting Income Statement and Balance Sheet: Method and Examples

Updated 11 October 2026 · Fact-checked

Forecasting an income statement and balance sheet means building projected (pro forma) statements from a sales forecast and stated assumptions. You project sales, link costs and assets to sales, add retained profit to reserves, and treat the balancing figure as external funds required or surplus cash.

Understand Forecasting Income Statement and Balance Sheet

A pro forma statement is a projected financial statement. It shows what the profit and loss account and balance sheet are likely to look like at a future date, if your assumptions hold. Companies use it to plan funds, to talk to banks and to check whether growth is affordable.

Everything starts with the sales forecast. Sales drive costs, stock, debtors and creditors. Once you fix sales, you decide how each other item behaves. Some items move with sales, such as cost of goods sold, debtors, inventory and trade creditors. Others stay fixed in the short run, such as share capital, long-term loans and often fixed assets.

The percentage of sales method is the most common technique. You express each item that varies with sales as a percentage of sales in the base year, then apply that percentage to forecast sales. Where the question gives ratios instead, such as debtor days or stock turnover, you use those to derive the balance sheet items.

The two statements are linked. Projected profit after tax, less dividend, is retained earnings, and it is added to reserves in the projected balance sheet. If projected assets exceed projected liabilities plus equity, the gap is external funds required (EFR). If liabilities plus equity exceed assets, you have surplus funds, shown as cash or investments.

Key rules to remember

Forecast sales: Forecast sales = Current sales × (1 + growth rate); Use the growth rate given. If an absolute increase is given, add it to current sales.
Percentage of sales: Item as % of sales = (Base year item ÷ Base year sales) × 100; Apply only to items that vary directly with sales.
Projected item: Projected item = Forecast sales × Item % of sales; Use for cost of goods sold, expenses, debtors, stock, creditors when assumed proportionate.
Retained earnings addition: Addition to reserves = Projected PAT − Dividends; Equals PAT × (1 − payout ratio) when a payout ratio is given.
Projected PAT: PAT = PBT − Tax = PBT × (1 − tax rate); Compute interest on the loans stated in the question before PBT.
Debtors from days: Debtors = Credit sales × Debtor days ÷ 365; Use 360 days if the question says so. Stock and creditors use cost-based figures: Inventory = COGS × days ÷ 365.
External funds required: EFR = Projected total assets − (Projected liabilities + Projected equity before EFR); A positive result is a funding need. A negative result is surplus.

How to solve Forecasting Income Statement and Balance Sheet questions

Follow the same order for any projection question. Do the income statement first, because it feeds reserves in the balance sheet.

1Read the assumptions carefully. List which items vary with sales, which are fixed, and any given ratios, tax rate, dividend payout and interest rate.
2Compute forecast sales from the growth rate or absolute increase given.
3Prepare the projected income statement: cost of goods sold, expenses, depreciation, EBIT, interest, PBT, tax, PAT.
4Work out dividends and retained earnings. Add retained earnings to opening reserves to get closing reserves.
5Project each asset: fixed assets (opening plus additions less depreciation), inventory, debtors and cash as per the stated assumptions.
6Project liabilities: share capital, reserves, loans (as per repayments or new borrowing) and trade creditors and provisions.
7Total both sides. The difference is the balancing figure, which is EFR if liabilities fall short, or surplus cash if they exceed assets.
8State your assumptions and the conclusion in one line, for example how much external finance is needed.

Quickest way: Percentage of sales shortcut

When to use it: Use when the question says all variable items grow in line with sales and asks only for EFR or projected PAT.

Find the growth rate in sales.
Increase every sales-linked asset and liability by that same rate.
Compute projected PAT and retained earnings from the margin and payout given.
Compute EFR = Increase in assets − Increase in spontaneous liabilities − Retained earnings.
Write the short projected balance sheet only if the question asks for it.

Common mistakes in Forecasting Income Statement and Balance Sheet

Growing fixed items such as share capital and long-term loans with sales.
Students apply one growth rate to the whole balance sheet.
Fix: Mark each item as variable or fixed before calculating. Keep fixed items unchanged unless the question adds capital or repays loans.
Forgetting to add retained earnings to reserves.
The income statement and balance sheet are treated as separate exercises.
Fix: After PAT and dividends, immediately write closing reserves = opening reserves + retained profit.
Taking the balancing figure as an error instead of EFR or surplus.
Students expect both sides to match automatically.
Fix: Project all items independently first. The gap is the finance needed. Show it as a new loan or surplus cash.
Ignoring depreciation when projecting fixed assets.
Students copy last year's net block forward.
Fix: Net block = opening net block + additions − depreciation for the year, and charge the same depreciation in the income statement.
Using sales instead of cost of goods sold for stock and creditors days.
Days formulas are memorised without the base.
Fix: Debtors use sales. Inventory and creditors use cost of goods sold or purchases, as the question states.
Calculating interest on EFR in a circular way without being asked.
Students try to make the answer perfect.
Fix: Unless told otherwise, compute interest on existing loans. Mention that interest on new funds is ignored.

Worked examples

Example 1

Sunrise Foods Ltd had sales of ₹10,00,000 this year. Cost of goods sold is 60% of sales, other expenses are 10% of sales, and the tax rate is 25%. There is no interest. Sales are expected to grow by 20%. The company pays out 40% of PAT as dividend. Prepare the projected income statement and find the addition to reserves.

Show the solution

Forecast sales = 10,00,000 × 1.20 = ₹12,00,000.
Cost of goods sold = 60% × 12,00,000 = ₹7,20,000.
Other expenses = 10% × 12,00,000 = ₹1,20,000.
Profit before tax = 12,00,000 − 7,20,000 − 1,20,000 = ₹3,60,000.
Tax at 25% = ₹90,000, so PAT = 3,60,000 − 90,000 = ₹2,70,000.
Dividend = 40% × 2,70,000 = ₹1,08,000.
Retained earnings = 2,70,000 − 1,08,000 = ₹1,62,000.

Answer: Projected sales ₹12,00,000; PBT ₹3,60,000; PAT ₹2,70,000; addition to reserves ₹1,62,000.

Example 2

Using the data of Sunrise Foods Ltd, the current balance sheet is: Share capital ₹4,00,000; Reserves ₹2,00,000; Long-term loan ₹2,00,000; Creditors ₹1,00,000; Total ₹9,00,000. Assets: Fixed assets ₹4,00,000; Inventory ₹2,00,000; Debtors ₹2,00,000; Cash ₹1,00,000; Total ₹9,00,000. Sales grow by 20%. Fixed assets, cash, share capital and loan stay unchanged. Inventory, debtors and creditors grow with sales. Use the retained earnings from Example 1. Prepare the projected balance sheet and find the EFR.

Show the solution

Growth factor = 1.20.
Projected inventory = 2,00,000 × 1.20 = ₹2,40,000.
Projected debtors = 2,00,000 × 1.20 = ₹2,40,000.
Projected assets = 4,00,000 + 2,40,000 + 2,40,000 + 1,00,000 = ₹9,80,000.
Projected creditors = 1,00,000 × 1.20 = ₹1,20,000.
Projected reserves = 2,00,000 + 1,62,000 = ₹3,62,000.
Liabilities before EFR = 4,00,000 + 3,62,000 + 2,00,000 + 1,20,000 = ₹10,82,000.
Assets ₹9,80,000 are less than liabilities ₹10,82,000. The difference is 10,82,000 − 9,80,000 = ₹1,02,000, which is surplus.

Answer: Projected total assets are ₹9,80,000. There is no EFR. The company has a surplus of ₹1,02,000, which can be shown as additional cash, taking cash to ₹2,02,000 and both sides to ₹10,82,000.

Exam tips

Start with a neat assumptions list. Marks are often given for correct treatment of each item.
Prepare the income statement first and show PAT clearly, because the balance sheet depends on it.
Show the working for each projected item beside the statement. A wrong total with correct workings still earns marks.
Check that the balance sheet totals agree after you add EFR or surplus cash. If not, recheck reserves first.
End with a one-line conclusion on funds needed or surplus, in the same style as a written answer.

Practice questions from Forecasting Financial Statements

Forecasting Income Statement and Balance Sheet in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forecasting Income Statement and Balance Sheet: frequently asked questions

What is the percentage of sales method?

It expresses each sales-linked item as a percentage of base-year sales and applies that percentage to forecast sales. It works best when costs, stock, debtors and creditors move in line with sales.

How do I prepare a projected balance sheet in CS Executive?

First project sales and the income statement. Then add retained profit to reserves, project assets and liabilities using the assumptions, and treat the difference between the two sides as EFR or surplus cash.

Is depreciation a fixed or variable item in projections?

Use whatever the question states. If no rate is given for the future, usually keep depreciation as given or as a percentage of the fixed assets. Always reduce the net block by the same amount you charge in the income statement.

What if the projected balance sheet does not tally?

That is expected until you add the balancing figure. If assets are higher, the gap is external funds required. If liabilities and equity are higher, the gap is surplus cash or investments.