Pro Forma Financial Statements

Jack simply asks Doggie Dogs’ senior accountant for information pertaining to the future cash inflows and outflows to create a pro-forma cash flow statement. A few weeks later, after Jack has created pro-forma financial statements for Doggie Dogs, he makes a recommendation to purchase the company. Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet. While pro forma financial statements project the future, there is no guarantee that those predictions are accurate.

Pro Forma Financial Statements

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. 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. The purpose of pro forma is to analytically predict how well a business will perform in the future to help business owners make the best decisions. This also informs potential investors of which businesses to invest in for future investment opportunities. Jack meets with a senior accountant who shows him the balance sheet first. A balance sheet is a financial statement that portrays a company’s financial position.

Two Types Of Pro Forma Income Statement

We put the “pro forma” label on these financial documents because there’s a lot of “what if” involved in their making. There are several other types of templates that could be helpful for a business other than the ones already presented here. There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements. We can glimpse Alice’s projected cash flow statements and balance sheets for each of her choices, for example, and their possible outcomes. Alice can actually project how her financial statements will look after each choice is followed.

Small business owners draft pro forma financial statements to quantify the impact of potential business decisions, such as taking out a loan to grow your business. Pro forma financial statements give you and your team something to consider before signing on the dotted line. Be advised that issuing pro forma financial statements to the public can be problematic, especially since the pro forma statements and the GAAP statements can vary so widely. Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business. For the effects of the business combination, only show the current and immediately preceding periods. You will see the difference between the original income statement and the pro-forma income statement below.

Rojections And Financial Forecasts

Pro forma statements reflect a dynamic environment in which change is still possible and a variety of different alternatives can be followed. They take the same forms as historical statements, the most common being the income statement, the balance sheet, and the statement of changes in financial position.

  • Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.
  • Similarly, you can use the data to review and decide whether or not you should spend more on your marketing campaigns in the fall months.
  • GAAP-conforming financial statements must be included with pro forma submissions.
  • In this way, all of the accounts of the proforma balance sheet can be estimated with the exception of cash, which becomes the final and forced or balancing entry.
  • Unrealistic assumptions will lead to inaccurate and unreliable pro forma statements.

A pro forma cash flow statement could detail any payments involved in a hypothetical project. For example, the company might have to pay for land, materials, and fees to contractors who build the facility. Later, after the project is completed, the cash flow statement might assume increased payments from customers. Your costs will be your lease, employee pay, insurance, licenses, permits, materials, etc.

What Is Pro Forma Income Statement?

Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management’s assumptions, the pro forma adjustments, and the application of those adjustments to historical financial information. Accordingly, we do not express such an opinion on the pro forma adjustments or the application of such adjustments to the pro forma condensed balance sheet as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended. A financial forecast may be used in lieu of pro forma financial statements. 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.

In any case, whether you want to purchase new equipment, undertake a new debt, or acquire another establishment, you will need to draft a pro forma income statement to determine the cause-and-effect of the decision. A pro forma income statement is an effective way to gain the attention of potential investors, convince them on your growth plans and seek funding. Continuing with the earlier example, the management can prepare pro forma cash flow statements to determine whether it will have enough liquidity or not to fulfill the debt servicing including repayments and interest payments.

They must also ensure they label all pro forma information as such, to avoid confusion with historical information, and list the specific assumptions and uncertainties about them they are making. The process of forecasting revenue, expenses, and profit is very important in financial planning and management. Pro forma statements are useful financial planning tools that provide a numerical perspective of a business’s financial position and performance in future periods. Sometimes, pro forma financial statements are simply altered or restated actual financial statements to show the impact of one-off financial decisions. If you own a business or manage the finances of an organization, you would often think of different possible outcomes for revenue, capital costs, investments, or profits based on certain assumptions.

These statements are useful for making estimates and analyzing future risks, but they’re not foolproof. So it’s best to use them in combination with other tools such as balance sheets, income statements, economic audits, and more.

This Topic describes the circumstances in which pro forma financial statements should be presented in filings, the form of their presentation, and guidance to be considered in their preparation. Although the specific rules of S-X Article 11 do not apply to smaller reporting companies, those registrants can consult S-X Article 11 for guidance when preparing pro forma financial statements required by S-X 8-05 for business acquisitions. Smaller reporting companies should present pro forma information for other current or probable transactions if that presentation would be material to investors. Therefore, the level of assurance given by the practitioner on the pro forma financial information, as of a particular date or for a particular period, should be limited to the level of assurance provided on the historical 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.

To create the first part of your pro forma you’ll use the revenue projections from Step 1 and the total liabilities and costs found here. You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus Pro Forma Financial Statements any interest payments you may need to make—and shows how it will affect your business’s financial position. Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant. This is because GAAP compliant reports must be based on historical information. Undistributed earnings or losses of a Sub-S registrant should be reclassified to paid-in capital in the pro forma statements.

  • With pro forma statements, businesses can better make assumptions on what decisions are best for the company, such as labor increases, production increases, or even expansion.
  • The income statement shows a company’s revenues and expenses over a specific period of time, while the balance sheet shows a company’s assets, liabilities, and equity at a specific point in time.
  • The historical condensed financial statements are derived from the historical financial statements of X Company, which were audited by us, and of Y Company, which were reviewed by other accountants, appearing elsewhere herein .
  • Using this information, now a company can start to adjust their business practices in order to accomplish their goals and to match pro forma projections.
  • Contrary to misguided perception, pro forma financial statements are not reserved for big corporations.

A pro forma invoice isn’t binding; it’s a way to make sure you and the client are on the same page before agreeing to the transaction. The balance sheet and the cash from finalizing are usually affected by financing activities. The pro forma needs to be reviewed for reasonableness in relation to volume, productivity, physician hours, clinic hours and clinic rooms.

Each individual’s unique needs should be considered when deciding on chosen products. FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy. With the additional machinery, the company would have to make an analysis of how it will affect the profits of the company. However, there are certain methods used when preparing the projections. Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering.

When Would I Need A Pro Forma Income Statement?

Investors should be aware that a company’s pro forma financial statements may hold figures or calculations that are not in compliance with generally accepted accounting principles . Sometimes, pro forma figures differ vastly from those generated within a GAAP framework, as pro forma results will make adjustments to GAAP numbers to highlight important aspects of the company’s operating performance. The presumptions about hypothetical conditions that occurred in the past and/ or may occur in the future are used to project the most likely outcome for corporate results in reports known as pro forma financial statements. For instance, a budget is a variation of a pro forma financial statement as it anticipates, based on certain assumptions, the inflow of projected revenues and the outflow of funds for a defined future period, usually afiscal year. To make things easier and to help them better compare one venture to another in similar terms, investors will insist on a standardized business plan and a standard set of pro forma financial statements. In fact, the Latin phrase pro forma means “as a matter of form.” It is a reference to the standardized nature of pro forma statements. As discussed in Note 2 to the pro forma financial statements, the pro forma adjustments reflect management’s assumptions that the elimination of duplicate facilities would have resulted in a 30 percent reduction in operating costs.

Pro Forma Financial Statements

Pro forma financial statements are a great tool to evaluate alternatives. Most businesses have limited resources, and pro forma reports can help you make better decisions with what you have. Financial statements, including the balance sheet, income statement, and cash flow statement, based on a set of assumptions.

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However, to entice investors through optimistic projections, make sure not to stray away from standard accounting practices. 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. These projected financial statements are referred to as pro forma financial statements. Normally, tax effects should be calculated with reference to the statutory rate in effect during the periods for which the pro forma statements of comprehensive income are presented.

Pro Forma Financial Statements

Jack travels to Doggie Dogs’ headquarters to review their financials and create a pro-forma balance sheet, income statement, and statement of cash flows. Planning and budgeting for business changes play crucial roles in operating a successful company.

Developing A Pro Forma Financial Statement

They might be overly optimistic or omit important information investors need to know about. There are many reasons why producing pro forma financial statements could be beneficial for your business. 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.

  • 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.
  • Combine projected expenses to total liabilities to solve for total projected liabilities.
  • Rather, the pro forma is a guide to help you decide if what you are proposing will be financially viable; to help set expectations on estimated cash flow and volumes; and to determine the impact on your current operations.
  • The related pro forma adjustments give appropriate effect to those assumptions.
  • For example, a business may use a pro forma financial statement to show what a businesses profit was if it sold off an arm of the company.
  • You drafted a balance sheet, income statement, and cash flow statement for next year, assuming increased utility, wages, and food expenses.

No matter how good or bad that portrayal may seem, it’s only a good guess as to what may happen. There are both benefits and downsides to the assumption structure that pro forma is built upon. Financing activities includes a mortgage on a building with the monthly payments categorized as an outlay; whereas borrowing money from a financial institution would bring cash into the organization as a cash inflow. If a company purchases stock, they are paying money out and a cash outflow is recorded.

Historical With Acquisition

If taxes are not calculated on that basis, or if unusual effects of loss carryforwards or other aspects of tax accounting are depicted, an explanation should be provided in a note to the pro forma financial statements. Infrequent or nonrecurring items included in the underlying historical financial statements of the registrant or other combining entities and that are not directly affected by the transactionDo not eliminate in arriving at pro forma results3. Conforming change in accounting principles adopted by registrantPro forma information should consistently apply the newly adopted accounting principles to all periods presented.4. Discontinued operationsIf included in historical financial statements, present only the portion of the statement of comprehensive income through “income from continuing operations.”5. Earnings per sharePresent historical basic and diluted per share data based on continuing operations and pro forma basic and diluted per share data on the face of the pro forma statement of comprehensive income. 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 . The SSARSs say that the auditor promises no material modification to the historical financial documents and understands that they are simply showing changes to the company’s financial picture based on a transaction or event using adjustments.

What Are The Benefits And Limitations Of Pro Forma Financial Statements?

However, balance sheets, income statements, and similar finance-tracking documents focus only on the history of transactions and the current economic status of your company. 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. 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. Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.

Pro Forma Financial Statements Definition

First, you should transfer the change in retained earnings from your pro forma statement of income across to the balance sheet. Remember that creating Pro forma income and financial statements are essentially best guesses. Remember to continually update the projections in your pro forma to ensure ongoing accuracy.