Pro Forma Definition, Uses in Income Statements and Letters of Intent

Still, there may be some gray areas, so use caution when relying on future projections. 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. When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.

  • You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.
  • When it comes time to create a pro forma statement, you have reliable numbers and reports to get started.
  • That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time.
  • This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year.
  • A pro forma financial statement is one based on certain assumptions and projections (as opposed to the typical financial statement based on actual past transactions).

A sales quote is prepared in the form of a pro forma invoice, which is different from a commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement, but because a pro forma invoice is not a legally-binding document, the price may change in advance of the final sale. In some countries, customs may accept a pro forma invoice (generated by the importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs. The U.S. Customs and Border Protection, for example, uses pro forma invoices to assess duty and examine goods, but the importer on record is required to post a bond and produce a commercial invoice within 120 days from the date of entry. If the required commercial invoice is needed for statistical purposes, the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer. Pro forma financials are not computed using generally accepted accounting principles (GAAP) and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following a merger.

Definition of Pro Forma Financial Statement

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. So, in order to show investors and other interested parties what the company’s income statement would have looked like without that one-time restructuring charge, the company included a proforma version of the income statement in its annual report.

What are the 3 purposes of pro forma financial statements?

However, pro forma financial statements help you create business plans, make financial forecasts, and get money from potential investors and lenders.

Pro forma financial statements project how a company might perform in the future if the business takes an assumed course of action. The pro forma accounting is a statement of the company’s financial activities while excluding “unusual and nonrecurring transactions” when stating how much money the company actually made. A pro forma financial statement can help business owners evaluate a corporation or company’s potential, so they can make informed decisions. Likewise, in real estate settings, pro forma helps investors assess a property’s future value. Pro forma income statements are important because of the information they can offer a company.

Investment Pro Forma Projection

Basic templates for creating pro forma statements can be found online, or they can be created using a Microsoft Excel spreadsheet to automatically populate and calculate the correct entries based on your inputs. For example, if a company is considering an acquisition or a merger, it may publish a pro format statement of the expected impact of the move on its future earnings and expenses. It takes into account past expenses and revenues and factors in the costs of the company’s plans for the fiscal year.

What is the difference between pro forma and projected financial statements?

Financial projections are built on a set of assumptions, and can be built from scratch for a startup company. Pro Forma financial statements on the other hand are based on your current financial statements, and then are changed based on one event.

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. A full-year pro forma is a projection of a company’s year-to-date results, to which are added expected results for the remainder of the year, to arrive at a set of full-year pro forma financial statements. This approach is useful for projecting expected results both internally to management, and externally to investors and creditors. Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet.

Limitations of pro forma financial statements

The documents are often used to express interest in business transactions or reveal the intended purpose and outcome of the transaction. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes Pro Forma Financial Statements Definition significantly. Pro forma financials in the United States boomed in the late 1990s when dot-com companies used the method to make losses appear like profits or, at a minimum, to reveal much greater gains than indicated through U.S.

In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions. In the Parliament of the United Kingdom, the equivalents are the Outlawries Bill in the House of Commons and the Select Vestries Bill in the House of Lords. In the Parliament of Canada, such bills are titled Bill C-1, An Act respecting the Administration of Oaths of Office, and Bill S-1, An Act relating to Railways in the House of Commons of Canada and Senate of Canada, respectively. In the Australian House of Representatives, a new bill is drafted at the start of each parliamentary term (in the 47th Parliament this was the Customs Amendment Bill 2022) and presented by the Prime Minister. This practice does not extend to the Australian Senate; instead other formal business is conducted (such as question time) before consideration of the governor-general’s speech.

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