Taste Good Limited: Preparing Pro Forma Financial Statements
The case features Taste Good Limited (Taste Good), a fictional Hong Kong–based company in the beverage industry. The board of directors has just instructed Alice Chan, the Chief Financial Officer (CFO), to prepare pro forma financial statements for the coming four years, which will be presented to institutional investors.
In addition, the pro forma financial statements would help the board assess the company’s gearing level for the coming years. Taste Good is required to comply with debt covenants arising from its bank borrowing. One of the covenants states that the firm’s gearing ratio shall not exceed 40% for two consecutive years. If such a covenant is breached, there is high risk that the loan will be called for immediate repayment.
Using the assumptions in the case, students should assist Alice to draft the pro forma statement of profit or loss and the pro forma statement of financial position. Working on the case will provide students with hands-on experience in performing financial projections and teach them to critically assess the validity of the given assumptions.
On completion of the case, students will be able to:
- Understand the functions of pro forma financial statements.
- Construct a set of pro forma financial statements (which include a statement of profit or loss and a statement of financial position) based on assumptions given in the case.
- Assess and criticize the validity of the given assumptions.
- Assess the gearing position of a company and explain means for improvement.