The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail. The pro forma financial information should A Deep Dive into Law Firm Bookkeeping 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.
- Now the income statement, balance sheet, and other data can be used to create the statement of cash flows.
- Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
- A pro forma template can give you a clear idea of your company’s financial health and a possible future outlook.
- No matter how good or bad that portrayal may seem, it’s only a good guess as to what may happen.
- Subtract these costs from the total of each income statement item in the second row.
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. Basically, it is a fancy word for “future” or “projected.” Sometimes, however, it is used to restate financial books in an unofficial way. Projecting the proper growth rate for sales is key to this analysis and, unfortunately, one of the most difficult things to do accurately. We can attempt to look at historical growth and adjust it using our beliefs about prospects, economic climate, etc.
Here are many samples of professional pro forma money statements:
Expenses in the income statement are divided into operating expenses, financial expenses and exceptional expenses. Let’s take an example of the owner of our widget seller’s business who wants to look back at historical profits and losses. 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.
- A pro-forma balance sheet is generated by making assumptions for the purchase or sale of assets, acquiring or paying off liabilities, and stock ownership.
- When we know how many units we need to sell, we may get a clearer picture of what else we need to do.
- Such a pro forma income statement would be based on a financial forecast.
- In reality, events might significantly differ from what is expected and therefore in retrospect, the pro forma statements can be called out by the investors as highly inaccurate.
- A pro forma cash statement makes it easy to see how operating activities would be affected if your cash flows were to increase (or dry up).
- An owner may create pro forma reports to assess the potential profitability of a product, or to determine if a business expansion makes financial sense.
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. 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 to help you make business decisions.
Sample Pro Forma Income Statement
A budget anticipates the inflow of projected revenues and the outflow of funds for a defined future period, usually a fiscal year. On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment. Want a more interactive experience than using an Excel spreadsheet, something you can easily update in real-time across multiple team members? Then, benefit from all the other supercharged features a Work OS (operating system) brings. The resulting calculations would show how a rise would impact the company’s net profit.
The Securities and Exchange Commission (SEC) is wary of pro forma statements because they are very much based on assumptions, not generally accepted accounting principles. Download the pro forma templates below or keep reading for a full breakdown of pro forma statements. While GAAP is required to create financial statements for publicly traded companies, pro-forma statements do not need to follow GAAP, as they are used internally or simply to estimate changes. 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. Were you looking for a pro forma income statement because you are starting your own business?
Business Pro Forma Financial Statement Template
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. However, this restructuring charge is a one-time extraordinary item, and is not part of the company’s normal business operations. You will see the difference between the original income statement and the pro-forma income statement below. Then notice that removing the one-time restructuring charge turns the company’s loss into a profit.
However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. In other words, pro forma financial statements start from real financial data. These models forecast the expected results of the projected dealings, with stress placed on calculable internet revenues, cash flows, and taxes.
Documents in Pro Forma Financial Statements
Simply put, pro forma financial statements are financial reports that are created on hypothetical assumptions. For example, in creating a pro forma income statement, you would need to forecast revenue for future periods. This can be done by analyzing past sales, orders for products or services in the current period or any backlog orders yet to be fulfilled. A realistic revenue amount can then be forecasted and used in a pro forma income statement. The Securities and Exchange Commission (SEC), 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.
This pro forma balance sheet can also be used for corporate retail or wholesale businesses. 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. In some respects, this type of analysis is a more accurate depiction of the company’s financial health and outlook. Further, organizations may want to develop their pro forma https://investrecords.com/the-importance-of-accurate-bookkeeping-for-law-firms-a-comprehensive-guide/ financial statements while they are doing an annual review of their business plan. Assumptions form the bedrock of pro forma statements; hence, a reliable pro forma statement is a financial model prepared on the back of realistic and justifiable assumptions. Finance professionals and business owners need to consider all the likely scenarios that affect the finances of a company in order to come up with accurate financial forecasts.
What Are the Types of Pro Forma Financial Statements?
My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Create a best, likely, and worst-case scenario separately in the statement. There are both benefits and downsides to the assumption structure that pro forma is built upon. This means that if there are any errors in the data, the analysis will not be accurate. Of course, this is important because cash runway is critical to a company’s ability to continue growing, pay employees, and invest in product development.