Pro-Forma Financial Statements

Pro-Forma Financial Statements

See Also:
Proforma Earnings
Balance Sheet
Cash Flow Statement
Free Cash Flow
Variance Analysis

Pro-Forma Financial Statements Definition

In accounting, pro-forma financial statements are hypothetical financial reports that show either forecasts of or alterations to actual financial statements. Pro-forma financial statements show the financial statements of a company in a hypothetical scenario that has not yet been realized or that represents a modification of the actual financial statements. Furthermore, pro-forma reporting is useful for showing what a proposed company would look like or for removing unusual or nonrecurring items from a financial report.

What is Pro-Forma?

What is pro-forma? In Latin, pro forma means for the sake of form. Additionally, pro-forma projections or pro forma reports are simply modified versions of actual financial statements that are made for the sake of showing what these documents would look like under certain hypothetical scenarios.
For example, if an entrepreneur has an idea for a company, and he wants to pitch the idea to potential investors, then he may want to draw up pro forma financial statements to show the potential investors what the company would look like once it’s up and running. In this case, the entrepreneur would create pro forma projections of the various financial statements and present them to the investors.
Or if a company incurs a major one-time cost that is not related to regular business operations, the company may want to show investors what the financial statements would look like without the affects of that major one-time cost. In this case, the company would include pro forma financial statements in its annual report.

Pro-Forma Financial Statement Example

Below is a very simple example of a pro forma income statement. Assume the company underwent a massive corporate restructuring that was very expensive. 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.
You will see the difference between the original income statement and the pro-forma income statement below. Then notice that removing the one-time restructuring charge turns the company’s loss into a profit. As you can see, the company may want investors and other financial statement readers to see the pro forma financial statement to understand why the company’s regular financial statement showed that the company took a loss during that period.

Regular Income Statement
Revenue                              $500,000
Cost of Goods Sold                    250,000
Restructuring Charge                  300,000
Interest Income                        50,000
Interest Expense                       25,000
Net Income (Loss)                    ($25,000)
Pro Forma Income Statement
Revenue                              $500,000
Cost of Goods Sold                    250,000
Interest Income                        50,000
Interest Expense                       25,000
Net Income (Loss)                    $275,000

Want to check if your unit economics are sound?  Download your free guide here.
Pro-Forma Financial Statements
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Pro-Forma Financial Statements

ARTICLES YOU MIGHT LIKE

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

Financial Ratios

See also: Quick Ratio Analysis Price to Book Value Analysis Price Earnings Growth Ratio Analysis Time Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The

Read More »

The Dreaded “F” Word

See Also: What is Factoring Receivables Accounting for Factored Receivables Journal Entries for Factored Receivables Can Factoring Be Better Than a Bank Loan? History of Factoring How Factoring Can Make or Save Money Factoring is Not for My Company The What, When, and Where About Factoring Working Capital Factoring: The Dreaded “F” Word The dreaded

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

September 12-15th 2022