Pro forma financial statements are a great way to assess the financial impact of the assumptions you make. Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC. However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party. The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims.

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  • A pro forma financial statement is a way to forecast your future earnings over a particular period.
  • When the percentage is consistent across multiple periods, there is likely some correlation between sales and receivables.
  • Pro forma statements, on the other hand, can ignore these expenses, along with several others required by GAAP like unusual or extraordinary expenses.
  • As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly.

Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now. The US Securities and Exchange Commission (SEC) has also clarified the rules regarding non-GAAP financial statements. These rules are known as Regulation G. Regulation G includes a requirement to disclose and reconcile non-GAAP financial statements, such as pro forma statements, to GAAP financial statements. Start by taking the information from your income statement and using the cash flow statement to determine where your money is going.

How to create a pro forma financial statement

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Use this Word template to create your own compilation report, as per the AICPA’s guidance. This is true @ashybadashy, but they are useful in other situations, as the article suggests. For example, they can be helpful in explaining to a board of directors that although the current year was not so great, all hope is not lost.

  • How we forecast each item will be different depending on the section.
  • Pro forma financial reports do not comply with Singapore Financial Reporting Standards (SFRS).
  • The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses.
  • This step includes accounts payable, payroll, and any other expenses within the range of you pro-forma balance sheet.

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? Risk analysis lets you take the future for a test ride, and try out different outcomes. This projected cash flow allows you to see whether you’ll have excess money to spend on things such as paying off loans or saving for an upcoming investment. You can also use a cash flow projection tool to guide you through this process. Yes, you can easily convert this Excel template into a Google Sheets-based balance sheet template.

Use this free template to create your own historical with acquisition pro forma documents. According to the SEC, for public companies, a pro forma balance sheet should have the same dates, plus one year from the last submitted balance sheet. If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. The pro forma balance sheet can still be an informative tool when evaluating the profitability of a company, although investors must be careful in their analysis of the information derived from the documents.

Additionally, using a separate credit card for business expenses, rather than a personal one, enables clear tracking of business-related debt, which can be accurately reflected on your balance sheet. A pro forma balance sheet is essentially the same as a projected balance sheet. It involves presenting a balance sheet that reflects the financial condition of a business on a particular future date. Think of the pro forma statements as extensions of each, projecting into the future. They’re constructed to answer specific questions relevant to one or more of the financial statements.

Limitations of Pro Forma Statements

In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions. For example, a company will report its actual sales and expenses for the quarter that just passed and, in the same chart, will list its projections of these numbers for the current quarter. A budget is based on certain assumptions about future expenses and revenues. It takes into account past expenses and revenues and factors in the costs of the company’s plans for the fiscal year. Centerfield will carry a $100,000 bank loan, and her $10,000 in net income is posted to retained earnings in the balance sheet.

What is a pro forma balance sheet?

As we just discussed, we’ll need to know three numbers before adding new debt to our balance sheet. We then add the new depreciation to any existing depreciation, and we’re done with fixed assets. We’ll need to take a few additional steps if we plan to purchase some new assets. If we get a consistent percentage across multiple periods, we can assume a correlation between costs and inventory.

Why Does Your Business Need a Pro Forma Financial Statement?

Unfortunately, most organizations don’t have a fleet of battle-tested CPAs to fully leverage pro formas, especially startups and small businesses. Therefore, we again recommend checking out our Ultimate Guide to Pro Forma Financial Statements, where you’ll find even deeper insights and best practices. And just remember – if it all still seems a bit much, Embark is always around to swoop in and save the day.

Full-year projection

These balance sheets are excellent tools for planning serious changes to the business, whether you’re thinking about taking on a new loan, purchasing a large piece of equipment, or even buying another company. In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk. 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 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.

The easiest way to handle depreciation is to look at the income statement for prior periods, which is where depreciation lives. The costs for inventory are often found in the Cost of Goods Sold (COGS) section of the income statement, which we’ll use for our forecast. There are no universal rules that companies must follow when reporting pro forma earnings. This is why it is important for investors to distinguish between pro forma earnings and those reported using generally accepted accounting principles (GAAP). These are models that forecast the expected result of the proposed transaction.

How to Create Pro Forma Financial Statements

Another, critical use case of pro forma financial statements is risk analysis. You might take a financial statement, and move around certain variables. This is known as sensitivity analysis, and basically shows how risky the company’s current position is. This is always important to do, but especially now in the midst of economic uncertainty.

Published On: April 29th, 2022 / Categories: Bookkeeping /