Pro Forma Definition

pro forma financial statements

One of the most common uses of pro forma statements is projecting the impact of a significant event, perhaps a business combinationor refinancing debt. Just like the previous section, a company can use a pro forma income statement, balance sheet, and cash flow statement to project how a significant event might affect its financial position.

Use this Word template to create your own compilation report, as per the AICPA’s guidance. Add the partner capital balance to the contributed capital instead of to retained earnings through pooling of interests. Watch the demo to see how you can more effectively manage your team, projects, and processes with real-time work management in Smartsheet.

Often, founders are surprised how much pro forma income statement can be advantageous to their startup operations in the foreseeable future. At its core, you have to think of a pro forma income statement as a strategic planning tool to move forward in the right direction. As a startup founder, you need to think of a pro forma income statement as a hypothetical report on specific scenarios. Finally, the income statement, balance sheet, and other data is used to create the statement of cash flows.

A company uses pro forma statements in the process of business planning and control. Because pro forma statements are presented in a standardized, columnar format, management employs them to compare and contrast alternative business plans. By arranging the data for the operating and financial statements side-by-side, management analyzes the projected results of competing plans in order to decide which best serves the interests of the business. Pro forma analyses are meant to paint a better picture of what is happening with the company, irrespective of one-time events, but considering the specific industry’s standards.

Understanding The Cash Flow Statement

If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. Pro forma income statements usually project a minimum of three years, whereas regular income statements may just be the year prior or based upon a lender’s request. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods.

What are the 3 basic tools for financial statement analysis?

Three of the most important techniques include horizontal analysis, vertical analysis, and ratio analysis.

Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements. Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained. The Securities and Exchange Commission , the United States’ regulator of its stock market, requires pro forma statements with any filing, registration, or proxy statement. They have articles governing the preparation of pro forma financial statements for public companies. These are Regulation S-X Article 11, and Regulation S-X 8-05 for smaller companies from 17 CFR 210. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering . This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.

Sally’s business is only a few years old, and she projects a small profit of $10,000 for the year. This post is to be used for informational purposes only and does not constitute pro forma financial statements 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.

How To Create A Pro Forma Income Statement

That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast. When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future. When you seek investment, you can present a pro forma financial statement which indicates how you’ll use the investment capital to grow your business sustainably. In many cases, pro forma statements are prerequisites for investment. The pro forma adjustments, directly attributable to the proposed change or transaction, which are expected to have a continuing impact on the financial statements.

Finally, in each page of the pro forma information, there must be a reference to the compilation report. Use this Excel pro forma invoice template bookkeeping to create your own pro forma invoices. Here’s a good template you can use to format and create your 3-year proforma income statement.

All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet. The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line. Traditionally, financial statement analysis is used to better understand a company’s performance over a specified period. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future. For this reason, these reports can be leveraged in several ways, including analyzing risk, projecting investments, and showing expected results before the end of a reporting period. Computer-assisted modeling has made assumption testing more efficient.

Pro Forma Financial Statements And Regulation

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. For example, if your company recently acquired or dispensed with another company, the assumptions would be the changes in finance expected. The limitations should discuss the challenges of predicting the financial future of a company.

For publicly-held companies, the SEC requires an introductory paragraph showing the proposed transactions, the company, the period covered, and what the pro forma information describes. The SEC also requires the pro forma balance sheet, pro forma income statement, and explanatory notes that provide adjustment justifications and pertinent detail. The pro forma financial information should be presented in columns and show the condensed historical amounts, the pro forma adjustments, and the pro forma amounts. GAAP-conforming financial statements must be included with pro forma submissions. The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes.

  • However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party.
  • Looking back at historical financial statements is helpful, but if you’re planning big changes, the past may not be an accurate portrayal of what the future holds.
  • You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.
  • This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.
  • You could deliver to them two sets of pro forma financial statements, and two risk assessment templates to use to discover their best option.

Pro forma financial statements are a great way to assess the financial impact of the assumptions you make. In a sense, pro forma financial statements allow management to A/B test different strategies without any real-world impact. As we said, a pro forma statement is a look at a what-if scenario. It’s a tool that business owners, decision-makers, stakeholders, investors, creditors, and others use to examine hypothetical conditions.

Once you understand the purpose, importance, and practicality of making pro forma income statements, you can draft them. When you make a pro forma income statement, make sure you are as detailed as possible throughout the process. One of the main reasons to make a pro forma income statement is to capture the attention of potential investors. You can draw the attention of potential investors by announcing your future earnings. The pro forma accounting is a statement of the company’s financial activities while excluding «unusual and nonrecurring transactions» when stating how much money the company actually made. QuickBooks accounting software allows you to create pro forma reports, and make changes as needed.

Pro Forma Cash Flow Statements

Calculate your total cash payments, net cash change, and ending cash position. Once again, this is the same process you follow for your normal cash flow statement. Keep in mind that because we used a sales-driven projection, other variables like operating expenses, depreciation & amortization, and interest expense were unaffected by our pro forma adjustments. The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include. Here’s a real-life example of a pro forma income statement, courtesy of Tesla Inc.’s unauditedpro forma condensed and consolidated income statement for the year ended December 31, 2016. In some countries, customs may accept a pro forma invoice if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs.

pro forma financial statements

You can also use pro forma statements to generate financial ratios. If, for example, you want to calculate the impact on the debt to equity ratio in future years, you can use the data from pro forma reports. Pro forma financial statements are a great tool to evaluate alternatives. Every business has limited resources, and pro forma reports can help you make better decisions regarding limited resources.

Pro Forma Financial Statement Definition

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. This pro forma projection is useful to investors and lenders, who want reassurance that your business is slated for profitability. In this case, think of pro forma statements like dipping your toe in the water before diving into a pool. If the water feels too cold – i.e., the pro forma projections aren’t favorable – it’s probably not a great idea to take a dip. But if the water is to your liking, then you might benefit from a nice swim. It may be tempting to think of a pro forma statement as the same as a business budget.

  • Also, banks will request pro forma statements in lieu of tax returns for a start up business in order to verify cash flow before issuing a loan or line of credit.
  • Looking at a few scenarios ranging from worst case to best, you can see what the impact of these changes might be and use this information to guide your decisions.
  • The objective of pro forma documents is to help management present their information.
  • Similarly, when a new corporation is envisioned, its founders will prepare pro forma financial statements for the information of prospective investors.
  • As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly.

A corporation may want to see the effects of three possible financing options. Therefore, it prepares a projected balance sheet, income statement, and statement of cash flows for each of the three financing options.

Pro Forma Example

Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company’s future prospects. In this way, each year reflects the results of operations of a business organization comparable with that of the acquiring corporation. However, the pro forma statements giving effect to the business combination should be limited to the current and immediately preceding periods.

Free cash flow represents the cash a company can generate after accounting for capital expenditures needed to maintain or maximize its asset base. Adding the balance of the partners’ capital to contributed capital in the combined company rather than to retained earnings for partnerships acquired through the pooling of interests. A change in the business entity resulting from the acquisition or disposition of an asset or investment, and/or the pooling of interests of two or more existing businesses. Review proposed decisions in marketing, production, research and development, etc., and assess their impact on profitability and liquidity. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Net income is affected by the interest expense, which also changes retained earnings, which also affects the amount of interest-bearing debt necessary.

Step #2 Add In Your Assumptions

Then it merges them to show what your financials would have looked like if you made the acquisition earlier. You can use this scenario as a model of what may happen in the future if you buy the other business now. A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred. If your company must produce an introductory paragraph with its pro forma documents, it should describe the content of your pro forma documents.

Other individual line items can also be easily forecasted, such as the cost of goods sold, since it can be assumed it will proportionally grow with sales. Line items like income tax expense, on the other hand, typically don’t change directly with sales. Stable businesses can generally estimate income tax expense as a percentage of income before taxes.

It is not a true invoice because it is not used to record accounts receivable for the seller and accounts payable for the buyer. Add up your operating expenses as well as any other expenses, including cash disbursements to owners, interest expense, income taxes, etc. Use the usual suspects – assets, total liabilities, owner’s equity – to complete the balance sheet. Then, list your outgoing cash flows, such as the cost of sales, salaries, etc. Next, identify any adjustments to your current assets/liabilities that may vary depending on the sales variance that you’ve used in your projection. 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.

Can You Compare Pro Forma Statements From Different Companies With One Another?

If the required commercial invoice is needed for statistical purposes, the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer. A pro forma invoice is the same as a commercial invoice, which, when used in international trade, represents the details of an international sale to customs authorities. A pro forma invoice is required to state the same facts that the commercial invoice would and the content is prescribed by the governments who are a party to the transaction. Add depreciation back to capital expenditure on the cash flow statement, which then feeds PP&E on the balance sheet. Granted, pro formas aren’t quite to Sorcerer Supreme levels of omniscience, but they sure do come in handy when it’s time to look at a what-if scenario or two. Want to know what the financial results from a potential business combination might look like a year from now? Or maybe you want to look backward and see where you might be today if that combination occurred last year.

pro forma financial statements

The COGS figure does directly vary with sales; if it does not, something is wrong with your numbers. The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. ledger account A sales quote is prepared in the form of a pro forma invoice, which is different from a commercial invoice. It is used to create a sale and is sent in advance of the commercial invoice.

Creating Pro Forma Financial Statements

Finally, Sally estimates overhead expenses, including office salaries and depreciation. Now that we understand what a pro forma is and why they’re so uniquely insightful, let’s zoom in on the different ways that companies use them. Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”). And deduct it – as well as any other operating expenses – from your sales.

pro forma financial statements

These are factually supported by the data from the original financial statements. Often, the difference between a past balance sheet and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures. Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet.

Owners create a set of projected financial statements, including the balance sheet, income statement, and cash flow statement, based on a set of assumptions. When presenting the historical operations of a business previously operated as a partnership, the financial information is adjusted to bring the statement in line with the acquiring corporation. Historical data listed in these instances includes net sales; cost of sales; gross profit on sales; selling, general, and administrative expenses; other income; other deductions; and income before taxes on income.

Types Of Pro Forma Statements

This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Sometimes, in pro forma documents, unsold inventory is even excluded. Not all these things should be left off, but the decisions of what is left off should be well thought out and explained to potential investors, so they have a clear indication of what they are viewing. Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements. Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors. Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions.

pro forma financial statements

It is a Latin term meaning «as a matter of form,» is applied to the process of presenting financial projections for a specific time period in a standardized format. Add back depreciation to capital expenditure, which is arrived at on the cash flow statement. This determines property, plant, and equipment on the balance sheet. Pro forma income statement is an effective way to get ready for unforeseeable business hurdles, increased taxes, growth plans, and acquisitions. Pro forma income statement allows startups to create a hypothetical projection of your income and expenses. Remember, what distinguishes these pro forma statements from your standard financials are the adjustments, not the calculations or even the format. As we said, certain regulatory bodies and scenarios will require specific information but, from a foundational perspective, the framework for each is essentially the same as what you already use when preparing your financials.

Pro forma EPS are calculated in the pro forma income statement, but the figure is also used in the pro forma balance sheet and the pro forma cash flow statement, when necessary. According to the SEC, when the dividends from stock exceed or are planned to exceed the current earnings, the EPS must be calculated. The SEC assumes that that proceeds from any additional shares will be used to fund dividends. Statements of cash flow, or cash flow statements, measure the sources of a company’s cash and how it uses that cash over the stated period. Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding.

Pro Forma Definition

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. Or your business is about to enter a new tax bracket, you can use pro forma financial statements to determine the effect that this decision will have on your business, enabling you to plan for the future as you move forward.

  • If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.
  • One caveat we must deliver before we go any further, however, stems from a word we’ve already used several times now – hypothetical.
  • Therefore, it prepares a projected balance sheet, income statement, and statement of cash flows for each of the three financing options.
  • Show the financial picture of a company sans a specific program or department may be floundering.
  • For businesses that previously acted as a partnership or sole proprietorship that are being acquired into a corporation, the statements must reflect that of the acquiring business.
  • These are factually supported by the data from the original financial statements.

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In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk. For more information on conducting risk analyses and the free templates to do so, see “All the Risk Assessment Matrix Templates You Need.” As an example, your team might need to decide between the acquisition of two separate businesses. You could deliver to them two sets of pro forma financial statements, and two risk assessment templates to use to discover their best option. Accountants who prepare companies’ pro forma financial statements are bound by certain requirements, as per the American Institute of Certified Public Accountants ’s Statements on Standards for Accounting and Review Services .

Mastering Pro Forma Financial Statements: The Three You Need

It would be nice if companies could borrow a page from a blockbuster superhero movie and travel to alternate dimensions. You know, maybe to see what would happen if they merged with the quickly-rising Widgets R’ Us, or were acquired by Global Conglomerate, Inc. We can, however, give you the next best thing ‒ a detailed explanation of pro forma statements and how to create them. First, you should transfer the change in retained earnings from your pro forma statement of income across to the balance sheet. Taking an online course like Financial Accounting can help you understand how to create and interpret different kinds of financial statements so you can find meaning in them. Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements.

Author: Barbara Weltman

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