Pro Forma Financial Statements

If the future deal with Wal-Mart goes through, the company is prepared for it and investors and creditors have an idea about the risks and rewards involved in the future. None of Holdings or any of its Subsidiaries has any reason to believe that such pro-forma balance sheet is misleading in any material respect in light of the circumstances existing at the time of the preparation thereof. During the course of the fiscal period, management evaluates its performance by comparing actual results to the expectations of the accepted plan using a similar pro forma format. Management’s appraisal tests and re-tests the assumptions upon which it based its plans. In this way pro forma statements are indispensable to the control process. This pro forma projection includes a business’ year-to-date results as well as forecasted income and expenses for the rest of the year to provide a full year view.

Finally, and regardless of its relative accuracy, a pro forma statement of cash flow forces management to think about the future expected cash flow and whether it is enough. For the effects of the business combination, only show the current and immediately preceding periods. In accounting, pro-forma financial statements are hypothetical financial reports that show either forecasts of or alterations to actual financial statements. Pro-forma financial statements show the financial statements of a company in a hypothetical scenario that has not yet been realized or that represents a modification of the actual financial statements. Furthermore, pro-forma reporting is useful for showing what a proposed company would look like or for removing unusual or nonrecurring items from a financial report.

This pro forma projection is useful to investors and lenders, who want reassurance that your business is slated for profitability. These financial statements are very helpful, but they only refer to the historical financial data of the company and therefore lack the necessary information to plan for the future. If your company must produce an introductory paragraph with its pro forma documents, it should describe the content of your pro forma documents. This means that it should define the transaction, the entities involved, and the periods of time. In this paragraph, you should offer a high-level explanation of the limitations and assumptions the pro forma documents were produced under.

Financial Ratios

If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. This chart of accounts will make up the pro forma statement for a 3 to 5 year period. Year one will broken down into monthly increments, while the following years will be broken down by quarter, and years 4 and 5 are broken down annually. A pro forma invoice is a precursory bill of sale that is sent to buyers before they receive a delivery or shipment of products. The pro forma invoice often gives details about and a description of the products that were purchased along with other important information like transport charges or shipping weight.

This is perhaps the most common reason for creating pro forma statements. From an internal management perspective, pro forma statements help with projecting the future state of a business. FP&A analysts and finance professionals use pro forma statements to evaluate multiple scenarios and assumptions to identify the financial impacts on an organization’s financial position, profit, and cash flow. Compiled pro forma financial statements can form the basis for calculating financial ratios and financial models, which test assumptions and relationships of your company’s plan. You can use them to study how changes in the price of labor, materials, overhead, and the cost of goods affect the bottom line.

Pro Forma Financial Statements

You can draw the attention of potential investors by announcing your future earnings. Often, founders are surprised how much pro forma income statement can be advantageous to their startup operations in the foreseeable future.


Management also uses this procedure in choosing among budget alternatives. Planners present sales revenues, production expenses, balance sheet and cash flow statements for competing plans with the underlying assumptions explained. Based on an analysis of these figures, management selects an annual budget.

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Planning For The Future

You may want to create financial projections for different investment amounts to cover your bases. Looking more closely at the actual numbers on each statement gives a much clearer look at Alice’s situation. Beginning with the income statement, income will increase if she works a second job or goes to Vegas and wins, while expenses will increase if she goes to Vegas at all. Assume that her second job would bring in an extra $20,000 income and that she could win or lose $100,000 in Vegas. Any change in gross wages or winnings would have a tax consequence; if she loses in Vegas, she will still have income taxes on her salary. Figure 4.15 “Alice’s Pro Forma Income Statements” begins with Alice’s pro forma income statements. To project future financial statements, you need to be able to envision the expected results of all the items on them.

Pro Forma Financial Statements

They are useful tools that business owners, investors, creditors, or decision-makers can use to examine different iterations of future events based on certain financial assumptions. This can help predict how well the business is likely to perform in the future. You should continually update your projections by recalculating your pro formas using any new and actual financial information you have as a base. Doing this on a monthly or quarterly basis will help ensure that your projections are as accurate as possible.

Pro forma financial statements are essentially “what-if” generators, giving you the ability to play through different hypothetical scenarios and explore their potential impact on your business. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started.

Anticipating Changes

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Making material financial assumptions is a key part of creating a pro forma statement. Estimates include how much money your business will make and how much it will cost to run.

Historical With Acquisition Pro Forma Template

This is because GAAP compliant reports must be based on historical information. This is a backward-looking projection of a company’s results in one or more prior years that includes the results of another business that the company wants to purchase, net of acquisition costs and synergies. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity. There are no universal rules that companies must follow when reporting pro forma earnings. This is why it is important for investors to distinguish between pro forma earnings and those reported using generally accepted accounting principles . GAAP enforces strict guidelines when companies report earnings, but pro forma figures are better thought of as “hypothetical” earnings, computed according to the relevance of certain events or conditions.

By creating pro forma reports for a variety of scenarios, you can see how a decision will have an impact on your bottom line and make your decisions accordingly. When presented with different investments scenarios, the pro forma financial statement can be used to make projections based on these scenarios. Assume the company underwent a massive corporate restructuring that was very expensive.

In this article, we discuss what pro forma statements and invoices are, why you should know about them and how to calculate them. Pro Forma Financial Statements are designed to emphasize specific figures in a company’s financial reports. The most notable examples of such reports are earnings statements published quarterly by public companies for shareholders and potential investors. Companies also use pro forma statements to highlight different financial transactions, like mergers and acquisitions. Pro forma statements do not have to comply with Generally Accepted Accounting Principles . In fact, a company’s pro forma figures often differ drastically from its standard GAAP documents.

Now you have to liquidate inventory, sell your machinery, and wind down relationships with cat widget vendors. Let’s say your business manufactures and sells widgets to the general public. You make widgets for kids, widgets for adults, widgets for dogs, and widgets for cats. Over a period of 6 months, you realize that the widgets for cats are just not selling. The documents are often used to express interest in business transactions or reveal the intended purpose and outcome of the transaction. After the values of all these liabilities have been accounted for, they should be totaled to give the final value of the total liabilities.

Pro forma is a Latin term that roughly translates to “as a matter of form,” and is most often used to describe a document that is based on financial assumptions or projections, such as a pro forma balance sheet. Make sure to use realistic market assumptions to write an accurate pro forma statement. Research and speak to experts to determine what a normal annual revenue stream is, as well as cash flow and asset accumulation. Because it’s impossible to predict the future, pro forma financial statements should only be considered an estimate. Pro forma financial statements illustrate how a company’s financial position might change in the future. Companies are generally prohibited from creating misleading or fraudulent pro forma financial statements. There are many reasons why producing pro forma financial statements could be beneficial for your business.

What It Means For Individual Investors

This is an opportunity for you to evaluate if every cost is necessary, and what you can cut. “Cautionary Advice Regarding the Use of ‘Pro Forma’ Financial Information in Earnings Releases.” Accessed Aug. 16, 2021. First off, you’ll need to set a sales goal for the period you’re looking into. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month.

What Is Pro Forma?

Let’s take a look at each report in the set and why management would choose to create a pro-forma version. Management is trying to figure out what the business looks like if a business event happens in the future by starting with standard report and adjusting it for the new projections. A pro forma condensed balance sheet and a pro forma condensed income statement, in columnar form, showing the condensed historical amounts, the pro forma adjustments, and the pro forma amounts. Footnotes provide justification for the pro forma adjustments and explain other details pertinent to the changes. Consider how each item on that statement can or will be changed during the coming year. You will need to estimate final sales and expenses for the current year to prepare a pro forma income statement for the coming year.

What Is A Pro Forma Financial Statement?

The foundation of a pro forma income statement focuses on various assumptions to make accurate quarterly or annual projections of revenue and expenses. The pro forma balance sheet might change if the new facility adds to the company’s property, plant, and equipment entries. And if the company uses debt to fund the project, there might also be a substantial loan balance on the liabilities side of the balance sheet.