What Is A Pro Forma Statement? Definition & Uses

An introductory paragraph describing the proposed transaction, the entities involved, the periods covered by the pro forma information, and what Pro Forma Financial Statements the pro forma information shows. Perform ratio analysis to compare projections against each other and against those of similar companies.

The income statement is probably the most commonly pro forma-ed financial statement because management, investors, and creditors all want to see what happens to profits if certain business deals take place in the future. Thus, management will create an estimated income statement based on certain assumptions. 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. A pro forma income statement combines the historical income statement of the acquiring company and a pro forma income statement of the business to be acquired for the previous five years, if possible. Pro forma adjustments exclude overhead costs not applicable in the new business entity, such as division and head office expenses. Your statements should show projected sales, expenses, profits, and cash flow.

The SEC assumes that that proceeds from any additional shares will be used to fund dividends. A financial forecast may be used in lieu of https://www.bookstime.com/. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld. The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range. The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses. 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.

What Is The Pro Forma Income Statement?

Assume the company underwent a massive corporate restructuring that was very expensive. According to accounting regulations, the company has to include that restructuring charge on its income statement. Because the restructuring charge was so big, it wiped out the company’s income and the company showed a loss for that period.

Because companies’ definitions of pro forma will vary along with their internal methods for forecasting and making assumptions, you must be careful when comparing pro forma figures between different companies. If you are not aware of how the companies define their pro forma figures, you may be inadvertently comparing apples to oranges. A pro forma invoice is a preliminarybill of salesent to buyers in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information, such as the shipping weight and transport charges. A pro forma invoice requires only enough information to allow customs to determine the duties needed from a general examination of the included goods. Adjustment to reflect the redemption of the senior limited partnership interests for cash of $888 million by The Goldman Sachs Group, L.P.

Pro Forma Financial Statements: How To Use Them To Make Smarter Business Decisions

An investor is any individual or entity that has a financial stake in a business, with the expectation of a financial return. Likewise, businesses use this information to paint a picture of future success to persuade potential investors and/or to maintain the confidence in their current investors. If you want to create your own pro forma financial statement, there are numerous templates available online for free.

With this information, decision makers of businesses can make informed choices for any organizational changes that need to made in order for company goals to be met. 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. Financial accounting and managerial accounting are the two main types of accounting that use pro forma financial statements.

Combine projected expenses to total liabilities to solve for total projected liabilities. Combine projected net income to total assets to solve for total projected assets. Subtract total expenses from total revenue to obtain projected net income.

Example Pro Forma Income Statement:

Pro forma balance sheets use existing financial statements as a basis to outline the estimated condition of the startup in the future after an intended transaction has occurred. 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. 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. Pro forma financial statements might show the expected impact of any projects in the pipeline.

To illustrate the process of creating pro forma financial statements, meet Sally, the owner of Centerfield Sporting Goods. Centerfield is a small firm that manufactures baseball gloves, and Sally is creating pro forma reports for the 2021 fiscal year.

For instance, SOX regulationsstate that a company must file a set of statements that conform to generally accepted accounting principles in conjunction with any pro formas to avoid giving the public a false impression of a company’s actual financial status. 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.

When deciding whether or not to invest in a company or a project, it’s reasonable to wonder how the future will unfold. There’s no way to predict the future with certainty, but you can analyze multiple “what if” scenarios to understand the potential outcomes. Pro forma financial statements enable investors to do that with available information. Pro forma financial statements project how a company might perform in the future if the business takes an assumed course of action. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders. 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.

Total Liabilities

Resource management Find the best project team and forecast resourcing needs. Some firms exclude unsold inventory of their statements, which, in a way, portrays inefficient management to produce inventory that cannot be sold.

If the assumptions are inaccurate, it may lead to inaccurate planning and execution. Past data may not always help to paint the correct picture in a dynamic and ever-changing business environment. Sally’s business is only a few years old, and she projects a small profit of $10,000 for the year. These assumptions can be off by a little or a lot, but the bottom line is their outcomes should not be weighed too heavily in decision-making without other indicators to back up the assumption.

Accounting

And as we mentioned earlier, they are not in compliance with GAAP, which means they have to be labeled as pro forma and cannot replace formal financial statements. Pro forma income statement allows startups to create a hypothetical projection of your income and expenses. Through the projected financials, companies are able to analyze risk, make projections of the results of the current accounting period, and also foresee investment opportunities. To start creating a pro forma statement, begin with an income statement from the current year. Find a regular income statement for the current year, if that is available. While looking at the income statement, identify the items that are likely to change throughout the year, and note any changes by percentage or dollars.

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. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted.

• Investopedia does not include all offers available in the marketplace.
• Carry out extensive research and review prior financial statements in order to arrive at the best assumptions.
• The auditor is not responsible for whether the statements are accurate and honestly prepared, but rather to ensure that there are no material errors, such as mathematical errors, oversights, inadequate disclosures, and clerical mistakes.
• One reason may be that the bank wants to make sure that the business is able to repay the loan.
• Project management Plan projects, automate workflows, and align teams.

These cash distributions and the related tax asset are not reflected in the Pro Forma Consolidated Balance Sheet Information. You should continually update your projections by recalculating your pro formas using any new and actual financial information you have as a base.

But according to the good folks at Merriam-Webster, hypothetical means “involving or being based on a suggested idea or theory.” Put another way, pro formas use information that can vary substantially from actual data. So while they’re extremely helpful at looking at events from different angles, never take them as gospel, only well-informed conjecture. Pro forma presentations should not include the effects of real estate properties for periods prior to actual construction since that type of adjustment would be a forecast or projection. Statement of comprehensive income presentation of gains and losses directly attributable to the transaction. However, such amounts should be presented as an adjustment to pro forma retained earnings with an appropriate explanation in the notes.

Bench assumes no liability for actions taken in reliance upon the information contained herein. Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months. Let’s say you want to increase your income by $18,000 over the course of one year.

Similar to creating a forecast, pro forma financial statements can help a company to explore projections about specific scenarios. Pro forma statements allow companies to evaluate future possibilities, decisions and actions based on assumptions rather than facts. In this article, we discuss what pro forma statements and invoices are, why you should know about them and how to calculate them. Inmanagerial accounting, meanwhile, accountants design financial statements prepared in the pro forma method ahead of a planned transaction such as an acquisition, merger, change in capital structure, or new capital investment. These models forecast the expected result of the proposed transaction, with emphasis placed on estimated net revenues, cash flows, and taxes.

For example, management might prepare pro forma statements to gauge the effects of a potential merger or joint venture. It also might prepare pro forma statements to evaluate the consequences of refinancing debt through issuance of preferred stock, common stock, or other debt. Professionals in managerial accounting create pro forma financial statements for internal use only. These statements help managers decide whether to make transactions like acquisitions, mergers, changes in a business’s capital structure or new capital investments. These financial statements—which give special attention to the estimated net revenues—cash flows and taxes, are meant to project the results of the transaction. Simply put, pro forma financial statements are financial reports that are created on hypothetical assumptions.

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Pro Forma Financial Statements — this refers to a set of financial statements designed to exhibit future financial results. They are created using known input data , along with an estimated amount of revenue, to project an estimated amount of earnings. These statements are commonly used for new risk funding programs such as captives and risk retention groups . When presented with different investments scenarios, the pro forma financial statement can be used to make projections based on these scenarios.

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. Plan for the future, by considering best, worst, and most likely case scenarios in detail. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Investopedia does not include all offers available in the marketplace. She holds a Bachelor of Science in Finance degree from Bridgewater State University and has worked on print content for business owners, national brands, and major publications.