Pro Forma Financial Statements: What to Know Plus Examples

Keep in mind, it is illegal to use pro forma financials to mislead investors. Under standard Generally Accepted Accounting Principles, these nonrecurring restructuring costs would get posted on the company’s income statement, substantially reducing profits or maybe even showing losses. The term pro forma is Latin and can be translated to mean “for the sake of form.” Companies use pro formas to evaluate what-if scenarios and how they could impact their business. Do your homework and maintain a balanced perspective when reading pro-forma statements. Try to identify the key differences between GAAP earnings and pro-forma earnings, and determine whether the differences are reasonable or if they are only there to make a losing company look better.

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. Finally, if substantial changes to the firm’s capitalization (the sum of their stock, debt, and retained earnings) are assumed to change substantially after the offering’s close date, pro forma documents must reflect that. The most common pro forma financial statements are projected balance sheets, income statements, and cash flow statements. Together, the documents help you assess whether your business’s financial health improves, declines, or remains the same following the decision. Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements.

Forecasts for Results of a Merger or Acquisition

For example, sales might be presented as 15% higher (best case), 5% higher (expected), 20% lower (worst case). If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year?

Whether in an assurance that the company is financially sound, also known as a comfort letter, or through a compilation letter, the auditor is only responsible for ensuring  the financial statements are prepared correctly. 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 pro forma financial statements as mathematical errors, oversights, inadequate disclosures, and clerical mistakes. The company’s management is responsible for the documents’ overall validity. 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.

How to Create a Pro Forma Cash Flow Statement

Further, include expense estimates and calculate gross, operating, and net profit. Let us look at some easy steps to create a Pro Forma income statement for a small business. You can also use a cash flow projection tool to guide you through this process.

• Pro forma presentation is not required if the transaction is already fully reflected in historical statements as a reorganization.
• 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.
• Google Docs, Intuit’s QuickBooks, Pulse, and PlanGuru are among the places to look for cash flow templates.
• Otherwise, if consummation of more than one transaction has occurred or is probable, pro forma information may be presented on either a combined or separate basis.
• According to Russell’s projections, he reaches the highest earnings when he hires a full-time administrative assistant.
• Using pro forma results to grossly misconstrue GAAP-based results and mislead investors is deemed by the U.S.

Remember, you are using certain assumptions to make a Pro Forma statement. The more accurate and realistic your assumptions are, the better your Pro Forma statement looks. For example, sales can be estimated using a top-down and bottom-up approach. Management can critically analyze the business from a conservative perspective if high-risk assumptions are involved in preparing Pro Forma statements.

Pro Forma Earnings Per Share

A pro forma balance sheet is not required if the acquisition or disposal is already reflected in a historical balance sheet. 3110.1Pro forma financial information is required if a significant business combination has occurred in the latest fiscal year or subsequent interim period, https://www.bookstime.com/articles/1-800accountant or is probable (see Section 2005.4). This includes any transaction or event that results in the registrant obtaining control over another entity. Pro forma presentation is not required if the transaction is already fully reflected in historical statements as a reorganization.

• A pro forma financial statement is supposed to include reasonably accurate information.
• 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 formas can reveal the company’s capacity to absorb a worst-case situation and be able to continue operating.
• Or how will that proposed transaction of buying new equipment impact you long term?
• Harvard Business School Online’s Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

Pro forma financial statements are valuable tools managers can use to plan for the future, anticipate and control risks and acquire funding for their business. 3440.1Statements of estimated taxable operating results and cash to be made available by operations are required in pro forma statements for real estate and leasing operations. These should be pro forma statements of the registrant, rather than of the property, giving effect to the acquisition. 3220.1Pro forma presentation should be based on the latest balance sheet included in the filing.

You might know a pro forma income statement by its other name, pro forma profit and loss. Keep in mind that past income statements play a small part, so it’s essentially an estimate based on a best guess of 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.