For this reason, some people interchange the terms ‘pro forma balance sheet’ and ‘balance sheet forecast’. A pro forma balance sheet will show the forecasted assets, liabilities, and equity position of a business or organization at any period in view. There are three main types of financial statements, the statement of financial position, also known as the balance sheet, the income statement, also known as the profit and loss statement, and the cash flow statement. Pro forma statements can be created for all three types of financial statements.
Public companies release pro forma financials under the guise of clarifying their financial position after a business acquisition. They take out one-time or unusual costs to offer a fuller picture of the business’s operating profit.
types of pro forma statements
In the early 2000s, Yahoo caught heat after years of releasing pro forma financial statements that downplayed hefty one-time costs from business acquisitions. Businesses and finance professionals are always on the lookout for efficient ways to carry out accurate business and financial planning. Preparing realistic pro forma financial statements is key to getting business planning right. A pro forma balance sheet typically has all the components of an actual balance sheet, the major difference is that some or all of the financial reports have been forecasted based on expected events.
The term ‘pro forma’ means an estimate or forecast of a financial statement. A financial statement balance sheet pro forma is a written report that details the activities and financial performance of a business.
How to Create a Pro Forma Balance Sheet
Potential and current investors use this information to decide where to spend their money. An investor is any individual or entity that has a financial stake in a business, with the expectation of a financial return. Likewise, businesses use this information to paint a picture of future success to persuade potential investors and/or to maintain the confidence in their current investors. They include the pro forma cash flow statement, the pro forma income statement, and the pro forma balance sheet. For this reason, professionals typically turn to forecasts and financial projections to guide their plans and answer critical “what if” questions. Pro forma financial statements are a common type of forecast that can be useful in these situations. Similar to a pro forma income statement, thepro forma balance sheetis a projection of a balance sheet.
GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better thought of as hypothetical earnings. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly. Using pro forma results to grossly misconstrue GAAP-based results and mislead investors is deemed by the U.S. Securities and Exchange Commission to be fraudulent and punishable by law.
Pro Forma Balance Sheet
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- Still, pro forma financials are not regulated to the same extent as historical financial statements.
- Hence while evaluating, investors and analysts should pay attention to what is and is not included while preparing the pro forma income statements.
- So, what is the key difference between fixed assets and inventory?
- 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.
Each type of pro forma financial statement will be further discussed in detail; such as the pro forma cash flow statement, pro forma income statement, and pro forma balance sheet. To ensure that financial statements are reporting accurate information for public use, they have to follow generally accepted accounting principles, or GAAP. GAAP are strict guidelines that all businesses must adhere to in the United States when preparing their financial statements. Companies face heavy fines, sometimes in the millions, and even federal jail time for not following GAAP. However, pro forma financial statements do not have to follow GAAP. A business is allowed to exaggerate and embellish their financial reporting because the pro forma statement is trying to predict what happens in the future.
Hence while evaluating, investors and analysts should pay attention to what is and is not included while preparing the pro forma income statements. A pro forma financial statement is supposed to include reasonably accurate information. However, companies that create these documents have some leeway in their assumptions. They might be overly optimistic or omit important information investors need to know about. Recall that our financing expense were capitalized and will be amortizaed over time. Transaction expenses, on the other hand, are expensed immediately under FAS 141r. Therefore, capitalized financing costs appear as an asset on the balance sheet, while transaction expenses reduced retained earnings.
- For example, if a company wishes to buy new machinery, it would have to do that through financing.
- They know certain things about their next year which will play a role in determining the pro forma balance sheet.
- That can help you show investors or partners what business finances could look like by the end of the fiscal year.
- Company Balance Sheet means the consolidated balance sheet of the Company as of December 31, 2014 and the footnotes thereto set forth in the Company 10-K.
- A balance sheet shows a company’s financial position by estimating assets, liabilities, and equity.
Instead, it’s a tool created by management to help project future performance and plan future events. Whether you’re trying to interpret pro forma financial statements or prepare them, these projections can be useful in guiding important business decisions. In fact, business owners, investors, creditors, and other key decision-makers all use pro forma financial statements to measure the potential impact of business decisions. Although https://personal-accounting.org/ we need both the interest and principal for complete pro forma financial statements, for now, we’re going to focus on the balance sheet and ignore interest payments. Our chosen focus means we’re only concerned with the principal. Assuming nothing much changed, we can grab last year’s principal amount from the cash flow statement (because that’s where we find it). A pro forma balance sheet is a balance with forecasted future values.