These cash distributions and the related tax asset are not reflected in the Pro Forma Consolidated Balance Sheet Information. Managers and other decision makers use pro forma statements as a tool to help construct annual budgets.

If a forecast is presented, management should clearly identify it as forward-looking. If the forward-looking information provided is not in the form of a comprehensive forecast of revenue and net earnings, disclosure of how revenue and operating efficiencies may vary given the assumptions underlying the forward-looking information that is provided should be included. Standard accounting statements like the balance sheet look at historical financial information, but pro forma documents look forward to help you predict future income through different types of accounting statements.

How To Do A Pro Forma Statement

There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense. The COGS figure does directly vary with sales; if it does not, something is wrong with your numbers. The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. Your assumptions are only as good as your baseline information that feeds them. Make sure your revenue, expenses, and growth numbers make sense and are error-free. If certain initiatives you had planned haven’t given you the returns you expected, it’s unlikely they will in the future unless something has changed. Here’s a good template you can use to format and create your 3-year proforma income statement.

A company may present “additional” EPS data reflecting the issuance of all shares if it considers this information meaningful. If this additional EPS is shown on the face of the pro forma statement of comprehensive income, it should be labeled appropriately.

A business’ pro forma statement may include projected revenue, estimated expenses, and cash flow for three to five years. Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles adjusted statements.

Balance Sheet Analysis

For this reason, SEC requires that all pro forma statements be accompanied with forms that do conform to GAAP, the company required to select those versions of formal statements most closely resembling the pro forma. In this case, think of pro forma statements like dipping your toe in the water before diving into a pool. If the water feels too cold – i.e., the pro forma projections aren’t favorable – it’s probably not a great idea to take a dip. But if the water is to your liking, then you might benefit from a nice swim. It would be nice if companies could borrow a page from a blockbuster superhero movie and travel to alternate dimensions.

• However, for all regular income statements presented in a filing, there must also be a pro forma statement.
• 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.
• 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.
• The objective of pro forma documents is to help management present their information.
• Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
• Adjustment to reflect the redemption of the senior limited partnership interests for cash of $888 million by The Goldman Sachs Group, L.P.
• Essentially, pro forma statements present expected corporate results to outsiders and often feature in investment proposals.

Say you own a small restaurant, and you’re considering extending your business hours and hiring a new waiter. You drafted a balance sheet, income statement, and cash flow statement for next year, assuming increased utility, wages, and food expenses. For small, private companies, pro forma financials can help you see the long-term impact of decisions pro forma financial statements you’re considering today. Pro forma financials have their place, but some public companies have taken advantage of loose rules to mislead potential investors. If management considers a flexible budget most appropriate for its company, it would establish a range of possible outcomes generally categorized as normal , above normal , and below normal .

See Section 2320 for guidance related to aggregate significance tests for real estate acquisitions. Fn 20 See paragraph .15 for a discussion of the form of the opinion on pro forma financial information in a pooling of interests business combination. Evaluate whether management’s assumptions that underlie the pro forma adjustments are presented in a sufficiently clear and comprehensive manner. Also, evaluate whether the pro forma adjustments are consistent with each other and with the data used to develop them.

Linking The Three Pro Forma Financial Statements

If actual interest rates in the transaction can vary from those depicted, disclosures of the effect on income of a 1/8 percent variance in interest rates should be disclosed. Contractual terms of the combination such as major new compensation contracts with management would require pro forma adjustment if the new contracts are entered into as part of the acquisition agreement. For discontinued operations (ASC ) that are not yet reflected in the annual historical statements. Emerging from bankruptcy and registering securities under the 1934 Act coupled with fresh start accounting, reorganization, changes in capital structure, or other events and transactions. Cash flow from operations includes cash inflows from customer payments, and cash outflow for material purchases and payroll costs.

• Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors.
• Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles adjusted statements.
• Excluded expenses could include declining investment values, restructuring costs, and adjustments made on the company’s balance sheet that fix accounting errors from prior years.
• Sally’s business is only a few years old, and she projects a small profit of $10,000 for the year.
• 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.
• Fn 20 See paragraph .15 for a discussion of the form of the opinion on pro forma financial information in a pooling of interests business combination.

Planners present sales revenues, production expenses, balance sheet and cash flow statements for competing plans with the underlying assumptions explained. Based on an analysis of these figures, management selects an annual budget.

Understanding The Cash Flow Statement

Now that we understand what a pro forma is and why they’re so uniquely insightful, let’s zoom in on the different ways that companies use them. A compilation is different from a review or audit of pro forma information. Show a more accurate picture of the company’s finance, as compared to GAAP or IFRS accounting frameworks. Identify the company assumptions about their financial and operating characteristics. ● investing activities such as movements in capital assets including building, equipment, land, business acquisitions, etc.

The Pro Forma Adjustments are based upon available information and certain assumptions that management believes are reasonable. The Pro Forma Consolidated Financial Information and accompanying notes should be read in conjunction with the consolidated financial statements and their notes. They are used by entrepreneurs to communicate the financial details of their opportunity to investors.

Pro Forma Financial Statement Definition

Because it’s impossible to predict the future, pro forma financial statements should only be considered an estimate. Pro forma financial statements provide predictions on how the future might unfold for companies you’re investing in. With that information, you can conduct ratio analyses using hypothetical numbers and gain insight into how projects might affect the value of your investment.

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The required new financing is often decided upon by the short-term or long-term debt residuals. Use this Word template to create your own compilation report, as per the AICPA’s guidance. The auditor must report if they are not independent, and the effect that relationship has on their reporting. If any fraud, material errors, or illegal activities are discovered, they may notify management, but are not required to do so if they are not relevant or if the management has already communicated their awareness. Recalculate the federal taxes of the predecessor business as though it were a corporation. Show the financial picture of a company sans a specific program or department may be floundering.

To start you on the road to projecting your future success, here are a few tips to consider when drafting your pro forma statement. 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. 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. 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. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim 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. In the case of estimated cash overages, the company can produce a plan for investment. Arguably, the statement of cash flow is the most important of the pro forma documents. If the pro forma balance sheet and income statements lead to a statement of cash flow that shows inadequate funds for what management has planned, the other documents will be invalid and may need to be reworked.

Investors, on the other hand, rely on pro forma financial statements to create “apples-to-apples” comparisons between different entrepreneurs and the opportunities they are pitching. Savvy investors understand that enterprising entrepreneurs will puff up the potential success of their ventures. The SEC has taken a much more direct approach by issuing a strong caution for companies to be particularly mindful of their duties not to mislead investors when presenting pro forma amounts. In a statement, the SEC recommends disclosing the basis of presentation for pro forma information, such as the transaction being omitted.

Pro Forma Definition

This means that it should define the transaction, the entities involved, and the periods of time. In this paragraph, you should offer a high-level explanation of the limitations and assumptions the pro forma documents were produced under. For example, if your company recently acquired or dispensed with another company, the assumptions would be the changes in finance expected.

A pro forma cash flow statement is a financial report that shows projected cash flow generated from business operations. The SEC has the reputation to consistently update and change its strict rules and regulations on pro forma financial statements. In comparison, conventional financial statements paint the financial situation of the past, whereas a pro forma financial statement, including an income statement, showcases the future financial health of the startup. Ultimately, it involves financial projections and assumptions that allow you to make calculated and logical business decisions. For decades, the proforma income statement has been a useful tool for startup founders, investors, and key decision-makers to examine the future financial health of the business. While pro forma financial statements project the future, there is no guarantee that those predictions are accurate.

Here’s a historical example of a pro forma income statement, courtesy of Tesla Inc.’s unaudited pro forma condensed and consolidated income statement for the year ended Dec. 31, 2016. 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. As permitted by the rules and regulations of the SEC, the Pro Forma Consolidated Financial Information is presented on a condensed basis. The Pro Forma Consolidated Balance Sheet Information was prepared as if the Pro Forma Adjustments had occurred as of February 26, 1999.