Pro Forma Financial Statements Examples

Other examples for when a company may use pro forma statements include refinancing debt, entering a new tax bracket and seeking investments. If a domestic registrant files a Form 8-K or registration statement for a business combination transaction and the target company is a foreign private issuer, the age of the pro forma information must be determined by reference to S-X 3-12. S-X Article 11 permits the ending date of the periods included for the target company to differ from those of the registrant by up to 93 days and may provide sufficient relief. However, the staff would not permit a registrant to omit an interim pro forma presentation because of different fiscal periods. Unlike historical financial statements, you should be aware of the fact that there is no regulation in place on the pro forma income statement and balance sheet.

Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes. These statements can also be helpful tools when planning capital investments or expenditures or for other long-term financial planning activities. Pro forma statements are useful in just about any situation involving financial modeling or projection. As the name implies, this statement summarizes the cash entering or leaving a company’s accounts.

Plans & Pricing

With the assumption that sales will increase at the approximate rate they have been over the last several years, pro forma statements are an essential tool to help decision makers understand how a change could affect the business. This statement summarizes the revenues, costs, and expenses incurred during a specific period.

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.

Creating Pro Forma Financial Statements

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Fn 3 For further guidance on the presentation of pro forma financial information included in filings with the Securities and Exchange Commission , see Article 11 of Regulation S-X. The source of the historical financial information on which the pro forma financial information is based has been appropriately identified.

ScaleFactor is on a mission to remove the barriers to financial clarity that every business owner faces. Using software to speed up everyday tasks and a network of financial experts to address complex matters, we’ve set out to provide business owners with what they need to run their back offices with confidence, now and at every stage of business growth. Fn 27 If either accountant’s report includes an explanatory paragraph or is other than unqualified, that fact should be referred to within this report.

She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Pro forma statements are financial statements based on hypothetical conditions and assumptions. 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.

Uses Of Pro Forma Statements Beyond Seeking Funding

The next time you consider taking on new debt, create pro forma statements to see the impact on future income. In accounting, pro forma refers to financial reports based on assumptions and hypothetical situations, not reality. Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions. For example, if a company has three different financing options available for a large project, they can create pro forma financial statements for each one to see which financing option is best. Or, if a company wants to make some new products, they can create a pro forma financial statement to forecast whether making the new products will increase expenses or affect revenue.

According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods. However, for all regular income statements presented in a filing, there must also be https://www.bookstime.com/ a pro forma statement. This form may also be used for corporate retail or wholesale companies. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements.

Pro forma financial statements incorporate hypothetical amounts, forecasts, or estimates, built into the data to give a “picture” of a company’s profits if certain nonrecurring items were excluded. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices. Basically, companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel accurately reflects the company’s true performance. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly. A quicker but often less accurate method of projecting a pro forma balance sheet involves using the historical relationships between different financial statement items to calculate the pro forma account balances. For example, if accounts receivable at year-end are typically 20 percent of annual sales billings and the new fiscal year’s forecast of invoiced sales is $2,500,000, then the projected fiscal year-end accounts receivable balance is $500,000. If you are going to have a very late list or plan to publish a blockbuster just before year-end, then the normal year-end historical relationship between annual sales volume and accounts receivable will not hold.

What Do I Use To Create A Pro Forma Statement?

Creating hypothetical scenarios or excluding unusual expenses can help a company to assess its future prospects. If a forecast is presented, management should clearly identify it as forward-looking. 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. Pro forma earnings per share are calculated by dividing a firm’s net income by its weighted shares outstanding, plus any new shares issued due to an acquisition. This metric determines the financial outcomes of any acquisition or merger and tells the parent company whether the transaction will be accretive or dilutive to the financial state of the company.

• Appendix A is an example of a pro forma based on the assumptions in the tables above.
• Pro forma adjustments should be computed assuming the transaction was consummated on the date of the latest balance sheet included in the filing.
• Most businesses have limited resources, and pro forma reports can help you make better decisions with what you have.
• A pro forma balance sheet is a comparison of a business’ assets and liabilities.
• If a company purchases stock, they are paying money out and a cash outflow is recorded.

Create a pro forma cash flow statement by calculating the end cash positions, net cash change and total cash payments. This is when you take the financial statements of your business and merge them with financial statements of the other to see what your previous year might’ve looked like and what it may look like in the future.

Discover A Better Way To Manage Pro Forma Statements And Finance Operations

This portion of the pro forma statement will identify the net effect on cash if the proposed business change is implemented. Cash flow differs from NI because, underaccrual accounting, certain revenues and expenses are recognized prior to or after cash changes hands. Today, there are several places where you can find a boilerplate template for generating a pro forma financial statement, such as the income statement, including Excel spreadsheets that will automatically populate and calculate the correct entries based on your inputs. They are used by entrepreneurs to communicate the financial details of their opportunity to investors. All serious business plans are accompanied by a standardized set of pro forma statements. Generally, the historical balance sheet and statement of comprehensive income should not be revised to reflect modifications of the terms of outstanding securities that become effective after the latest balance sheet date, although pro forma data may be necessary.

• In the case of estimated cash overages, the company can produce a plan for investment.
• To ensure that financial statements are reporting accurate information for public use, they have to follow generally accepted accounting principles, or GAAP.
• We can glimpse Alice’s projected cash flow statements and balance sheets for each of her choices, for example, and their possible outcomes.
• Jack travels to Doggie Dogs’ headquarters to review their financials and create a pro-forma balance sheet, income statement, and statement of cash flows.
• We believe that our examination provides a reasonable basis for our opinion.
• You can use a pro forma income statement to review the projected operational business costs against the current fiscal budget.

Presentation of the acquiree’s financial statements without accompanying pro forma information can be misleading, and there is an expectation that the information required by Item 9.01 of Form 8-K will be filed as promptly as feasible. The pro forma information presented in connection with a Form 8-K reporting consummation of an acquisition is not expected to reflect definitive conclusions regarding allocation of the purchase price or other effects. However, uncertainties affecting the pro forma presentation and the possible consequences when they are resolved, if material, should be highlighted. Determine that computations of pro forma adjustments are mathematically correct and that the pro forma column reflects the proper application of those adjustments to the historical financial statements.

A pro forma income statement would show how the company’s revenues and expenses might change and ultimately affect company profits. Income statements would show how much it would cost a company to pursue the project and how much revenues might improve after completion. Simply put, it’s a future or projected income statement, or it can even be used to restate financial books in an unofficial way. 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.

Pro forma financial statements are best prepared before any major transactions are entered into, so that business decision makers feel more assured that they can meet company goals. This is called managerial accounting, or when decision-makers prepare financial statements to meet proposed company goals. The pro forma cash flow statement, income statement, and balance sheet should not be confused for standard financial statements, that also include the cash flow statement, income statement, and the balance sheet.

Pro forma financials offer businesses ways to make realistic assumptions about future growth rates and costs. According to Johnson, this is useful when you’re seeking outside capital to grow. “Potential capital suppliers will carefully examine pro forma financial statements before committing capital to the firm,” Johnson said. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

• Management could not supply us with sufficient evidence to support this assertion.
• There may be several sets of these pro forma documents, each based on different potential investment amounts, or just one based on what you think you need.
• Pro forma statements can be created for all three types of financial statements.
• All projections and forecasts must comply with the guidelines for projections in S-K 10.
• For example, if it’s currently April and you want to perform a full-year pro forma projection, you would account for all the financials up to April and project the remainder of the year.

Depending on the facts and circumstances, the staff may not object if the registrant and its independent accountants elect to present retroactively a conversion of securities as if it had occurred at the date of the latest balance sheet included in the filing . Generally, pro forma adjustments should be presented gross on the face of the pro forma statements. Alternatively, a more detailed explanation of the components of the adjustments may be presented in the notes to the pro forma statements. Pro forma presentation should be based on the latest balance sheet included in the filing. A pro forma balance sheet is not required if the acquisition or disposal is already reflected in a historical balance sheet. Say you own a small restaurant, and you’re considering extending your business hours and hiring a new waiter.

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. “This is called sensitivity analysis (determining the sensitivity of the firm’s performance to different variables) and can help both firm insiders and potential suppliers of capital determine the risks of the firm,” Johnson added. Then, list your outgoing cash flows, such as the cost of sales, salaries, etc.

Get Your Financial Statements Cheat Sheets

Pro forma financial information giving effect to the disposals should be filed on Form 8-K when the disposals occur if the disposition is significant under Item 2.01 of Form 8-K. If the outcome of minimum or maximum participation does not have a pervasive impact on the financial statements, possible outcomes and their impacts may be discussed in a note to the pro forma financial statements. To project future financial statements, you need to be able to envision the expected results of all the items on them. This can be difficult, for there can be many variables that may affect your income and expenses or cash flows , and some of them may be unpredictable. Predictions always contain uncertainty, so projections are always, at best, educated guesses.

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 are assumed to change substantially after the offering’s close date, pro forma documents must reflect that. They include the pro forma cash flow statement, the pro forma income statement, and the pro forma balance sheet.

Still, they can be useful in helping you to see how the future may look. It is better to be cautious and assess the projected pro forma income statement calculations along with the rest of the financial documents to get more accurate and updated projections. Whether you “might” lose an account or make an acquisition, pro forma financial statements allow a glimpse into the future. There can be a lot of problems if the company’s management decides to issue its pro forma statements to the general public.

Fn 15 This wording is appropriate when one column of pro forma financial information is presented without separate columns of historical financial information and pro forma adjustments. Fn 11 This wording is appropriate when one column of pro forma financial information is presented without separate columns of historical financial information and pro forma adjustments. Fn 8 This wording is appropriate when one column of pro forma financial information is presented without separate columns of historical financial Pro Forma Financial Statements information and pro forma adjustments. Pro forma financials have their place, but some public companies have taken advantage of loose rules to mislead potential investors. It usually helps to build out a revenue model where you can add in your assumptions and sense check numbers to see if they make sense before you plug into your income statement. This way, you can do step #4 before you plug into your financial statements. In fact, take each pro forma income statement figure with a grain of salt.