18 3 Pro Forma Financials Principles of Finance

Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions. Big 5 Sporting Goods announced record earnings in the third quarter of 2020, attributing its huge success that quarter to the impact of people’s reactions to the COVID-19 pandemic. With so many people in quarantine still wanting to make healthy lifestyle choices, sporting goods stores were making record sales. The impacts of the pandemic are extremely difficult to predict, making it a challenge for Big 5 Sporting Goods and other companies to assemble 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 https://quick-bookkeeping.net/ year, but not for interim periods. However, for all regular income statements presented in a filing, there must also be a pro forma statement. Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception.

Full-year projection

Our hypothetical natural gas power plant has the following properties that are shown in Table 4.7 (from the Plant Properties tab). Some of these plant properties aren’t relevant to us right now, but we will come back and use this hypothetical plant as an example in future lessons. The Budget Tracking Template is another way to get a clear picture of the organization’s https://business-accounting.net/ spending and forecast how those expenses will impact the bottom line. With permission controls, external stakeholders only can view the template, letting the accounting team change any numbers to avoid accidents. Want a more interactive experience than using an Excel spreadsheet, something you can easily update in real-time across multiple team members?

• GAAP must be strictly followed by public companies when they report their financial statements to the Securities and Exchange Commission (SEC).
• The creation of pro forma cash flow statements can be prepared for different periods.
• The primary difference between a pro forma cash flow statement and a standard cash flow statement is the level of detail of the information provided.
• Our pro forma balance sheet shows that we will have a strong financial position, with increasing equity and minimal debt.
• There are strict guidelines when using GAAP while pro forma income statement figures are seen as hypothetical.

By analyzing the cash flow summary, business owners and managers can gain insight into the financial health of their business. It provides a broad overview of how cash is being allocated and managed, and if cash is available for development and expansion. A manager should identify areas of cash overflow and deficit, and take preventive measures to avoid them. Additionally, trends can be identified from past cash flow statements and used to anticipate future cash flows. It’s helpful for FP&A to provide business leaders with side-by-side comparisons based on different assumptions, better informing the entire decision-making process. If, for instance, management is deciding between two separate proposals or business plans, they can use pro forma statements for each scenario and see which might serve their goals and vision best.

Capital Expenditure Forecast

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How to create pro forma financial statements

As such, through the pro forma cash flow, the company may use an alternative and not incur such expenses so that the cash balance will result in a positive cash flow. The cash flow statement provides a report of the movement of cash inflows and outflows over a specified period of time. An income statement is one of the most critical financial statements in every accountant’s toolbox.

Creating Pro Forma Financial Statements

If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. Do you want to learn more about what’s behind the numbers on financial statements? 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? Or how will that proposed transaction of buying new equipment impact you long term?

Let’s begin with the income statement, using a percent of sales forecast to keep everything straightforward. Start with an income statement from your most recent fiscal year and identify which items you’ll adjust for the projection. Here we’ll be covering definitions, uses, and benefits of pro forma statements. In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions. Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company’s future prospects. Pro Forma Cash Flow Statements may not present an accurate report of the company’s financials because it may exclude information that can be material and mislead investors and stakeholders.

Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet. A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations. As such, when providing the GAAP financial statements, the pro forma statements are also presented as a supplement report to provide additional information on the company’s overall financial health. The creation of pro forma cash flow statements can be prepared for different periods. This includes expenses expected to be incurred on the Proforma balance sheet. Examples of such costs are accounts payable, wages paid, credit payments, mortgage payments, etc.