Tag Archives | financial statement

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

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Pro-Forma Financial Statements

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Pro-Forma Financial Statements

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Full Disclosure Principle

See also:
Accounting Principles 5, 6, and 7
Accrual Based Accounting GAAP Rules
Generally Accepted Accounting Principles (GAAP)
What is GAAP?

Full Disclosure Principle Definition

As one of the principles in Generally Accepted Accounting Principles (GAAP), the Full Disclosure Principle definition requires that all situations, circumstances, and events that are relevant to financial statement users have to be disclosed. In other words, all of a company’s financial records and transactions have to be available for viewing.

Full Disclosure Principle Example

The Full Disclosure Principle in financial reporting exists so that individuals, from potential investors to executives, can be made aware of the financial situation in which a company exists. Without the Full Disclosure Principle of GAAP, it is likely that companies and organizations would withhold information that could possibly shed negative light on their financial standing. A prime full disclosure principle example of this occurred during the Enron scandal. In this case, particular individuals and investors argued that this principle was violated. It was also argued that Enron withheld and fabricated crucial information to investors that would have made a difference in how these individuals invested in the company.

Full Disclosure Principle Consequences

GAAP designed this principle to protect the safety businessmen and investors. As a result, there are consequences when companies fail to adhere to this rule. In addition to the consequence that investors can be mislead into making unintelligent decisions as a result of withholding financial information, the Securities and Exchange Commission (SEC) also maintains the right to penalize any misbehavior. A company can be fined millions of dollars for any discrepancies or misconduct involved with their financial statements or accounting information.

In one example of this, Worldcom was fined 750 million dollars for reporting inflated income to investors. However, Worldcom was responsible for over 2 billion dollars in financial damages. Therefore, while the financial penalty to Worldcom was substantial, the consequence to the investor was far greater. The penalty for Woldcom was 75 times greater than any previous penalty. Thus, the Worldcom example is showing that the full disclosure principle is intact to prevent nasty consequences from occurring to both companies and the individual investor.

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Full Disclosure, Full Disclosure Principle, Full Disclosure Principle Definition, Full Disclosure Principle Example

Full Disclosure, Full Disclosure Principle, Full Disclosure Principle Definition, Full Disclosure Principle Example

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Calculate EBITDA

See Also:
EBITDA Definition
EBITDA Valuation
Operating Income (EBIT)
Operating Profit Margin Ratio Analysis
Net Income
Adjusted EBITDA

Calculate EBITDA

Calculate EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) in three easy steps. For an EBITDA meaning and use in valuation, click the above links for a better description.

EBITDA Calculation Formula

Step 1) The EBITDA calculation formula is quite simple; in fact, all of the information needed is contained within the income statement. The first step to calculate EBITDA from the income statement is to pull the operating profit or Earnings before Interest and Tax (EBIT). This can be found within the income statement after all Selling, General, and Administrative (SG&A) expenses as well as depreciation and amortization.

Step 2) Because the EBIT has already had the depreciation and amortization expense taken out within the income statement, it is necessary to add these expenses back to see what sort of cash flow the company really has contained within EBITDA. Once you add non-cash expenses to EBIT it is then considered the EBITDA and true amount of cash contained within the company. Many investors and users of financial statements use this number because the non-cash expenses do little to say about the actual cash flows of the company. Thus, the EBITDA reveals the true position of the company.

Use the following EBITDA calculation formula:

Operating Profit(Income) or EBIT
+ Depreciation Expense
+ Amortization Expense
EBITDA

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Accounting Controls

See Also:
Accounting Concepts
Accounting Principles
Accrual Based Accounting
Accounting Income vs. Economic Income
Audit Scope

Accounting Controls Definition

Accounting controls, defined as the company policies which result in valid accounting, are essential for every single company. They can come in many forms: policies for transactions, processing of statements, filing paperwork like invoices, communication between departments involved in accounting, and more.

Accounting Controls Explanation

Accounting controls, explained also as the only method to creating reliable accounting, serve a variety of purposes. Mainly, accounting controls and procedures serve 3 purposes: organizing documents used in accounting, creating uniform financial statements, assuring the validity of transfers and expenditures. Though a variety of other controls, best practices, and policies exist they can be considered variations of this purpose.

Supporting Documents

Supporting documents are crucial to accounting. These documents, like invoices and previous financial statements, provide the data needed to begin accounting for company finances. Due to this fact, you must account supporting documents for themselves. Most companies have filing policies which ensure documents are accessible as needed.

Uniform Financial Statements

Uniform financial statements are the result of proper accounting controls. Policies, also known as accounting controls, regulate how data is processed and turned into financial statements. These policies must be very specific to make sure employees do not become confused on how to assemble statements. With accounting controls like auditing and account reconciliation, a company can make use of statements for financial as well as managerial accounting.

These controls also assure the validity of transfers and expenditures. With these policies in place, a company can feel more confident that theft is not occurring. Additionally, a business can make sure that finances are spent in a prudent manner. A company must make accounting controls which ensure that both of these matters are attended to.

Accounting Controls Example

McKenna is the CFO of a major fortune 500 company. She has been the CFO for this business before it created the success it now has. As such, she has created the accounting controls checklist which is now in place.

She first started by creating controls on expenditure of company monies. From her point of view, before the company has statements it must first make sure that it is not spending the funds it worked so hard for.

Then, McKenna created document policies. She needed to account for all the data she used to create statements. This policy ensures that she knows where all the important papers are and how to find them.

Finally, McKenna created policies for forming financial statements. In her opinion this came last; the first to support this.

Conclusion

McKenna had a hard time erecting these processes; employees took time to learn, resisted, and made mistakes. In some situations, she used software where she could not rely upon the human factor. In others, she put forth the effort to instruct and explain why these policies were so important. McKenna even made compromises and allowed for a learning curve. With this, people saw her as an office hero rather than a villain. McKenna is proud of herself, her employees, and the entire company for making such a pivotal change.

Accounting controls are a great way to prevent fraud, improve processes, and protect your company. Check out our free Internal Analysis whitepaper to see what accounting controls you are missing.

accounting controls
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10 Q

See Also:
Balance Sheet Definition
Income Statement
Cash Flow Statement
Pro-Forma Financial Statements
Statement of Financial Accounting Standards (SFAS) Fiscal Period 10K

10 Q Definition

What does 10 Q mean? The 10 Q definition is a quarterly cumulative financial statement required by the Securities and Exchange Commission (SEC) under the Securities and Exchange Act of 1934 for all publicly traded companies. The 10-Q filing deadline for financial data is always due 35 days after each of the first three quarters throughout the year. There is no 10 Q filing at the end of the year. This is because the more extensive and comprehensive 10K is due at year end.

10-Q Form

A 10-Q form requires that a company provide a balance sheet, income statement, cash flow statement, and a statement of stockholder’s equity. The 10 Q form should also disclose any major changes made since the last financial filing. These disclosures may include a change from one accounting method to another, or a discussion of a contingent liability such as an ongoing litigation. The SEC also requires that a company provide relevant financial data from the exact same filing time during the past year. This makes information readily comparable from one period to the next, and one year to the next so that investors can have a good picture or idea of where the company is heading.

10 Q Definition, 10-Q Form, 10 q

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Why Do Most Financial Projections Fail?

Do you know the number one reason most financial projections fail? It is because sales are over estimated!

Why Do Most Financial Projections Fail?

This time of year we are busy working with clients preparing projections for the next year. What we find is it is very difficult for clients to do an accurate financial statement projection if they can’t project sales. Working with companies to project the top line of the financial projections is the hardest part. Once you have the top line the rest of the projections fall into place based on historical numbers.

How To Project Sales

So how do you project sales? We generally start off with last year’s sales numbers. We ask ourselves do we think they are going to increase or decrease? If so, then by how much? We determine by product line how much sales we need to be profitable. We look at recent sales trends and review them with the sales team. Finally, we prepare a backlog schedule with identified sales on a monthly basis. The greater the backlog identified, the greater the accuracy!

When projecting sales it is important to be reasonable. You should strive to “under promise and over deliver”. Often the management teams strives to set the bar high for goal setting purposes. You don’t want to shoot yourself in the foot with your banker if you miss you projections by a wide margin! It is better to come in a little above your projections rather than quite a ways below your number.

What has been your experience in projecting sales?

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

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