Definition / Examples of Pro Forma Financial Statements
How do Pro Forma Financial Statements work?
Types of Pro Forma Data
What does this mean for individual investors?
Definition / Examples of Pro Forma Financial Statements
Pro Forma financial statements are projections that show numbers that do not reflect the actual results as of a certain date for a company. Pro Forma financial statements show how a company’s financial position might change in the future. It is not necessary for future projections to adhere to the highest standards of accurate accounting, but companies should avoid fraudulent practices when creating Pro Forma statements. Since it is impossible to predict the future, Pro Forma financial statements should be regarded as mere estimates.
How do Pro Forma Financial Statements work?
When deciding to invest in a company or project, it is reasonable to wonder how things will develop in the future. While the future cannot be predicted with certainty, you can analyze multiple “what if” scenarios to understand the potential outcomes. Pro Forma financial statements enable investors to do this using available information.
Companies in the United States adhere to Generally Accepted Accounting Principles (GAAP) as best practice. Although GAAP standards provide guidelines for presenting information accurately and transparently, it can sometimes be beneficial to include or exclude certain information. Specifically, you may want to know how the expected change will impact the company’s earnings. For example, if an energy company plans to build a new power plant, investors may wonder how that opportunity will affect the company’s earnings. Pro Forma exercises offer a review of the expected results.
Note: Considering that Pro Forma financial statements predict the future, there is no guarantee that those forecasts are accurate. Unexpected events, poor assumptions, and other factors may lead to significantly different outcomes.
Types of Pro Forma Data
Some of the most common financial statements used for Pro Forma financial statements are the income statement, cash flow statement, and balance sheet.
Pro Forma financial statements can show the expected impact of any projects in the pipeline. For example, they may assume that the company plans to build a new facility to produce more goods for customers.
The Pro Forma income statement will show how the company’s revenues and expenses might change and how that could ultimately affect the company’s profits. Income statements will display how much it will cost the company to undertake the project and how revenues might improve after it is completed.
The Pro Forma cash flow statement can detail any payments associated with a hypothetical project. For example, the company may need to pay for land, materials, and contractor fees for building the facility. Later, after the project is completed, the cash flow statement may assume an increase in payments from customers.
The Pro Forma balance sheet may change if the new facility adds to the company’s total assets from fixed assets, land, and equipment. If the company used debt to finance the project, there may also be a significant loan balance on the liability side of the balance sheet.
What does this mean for individual investors?
Pro Forma financial statements provide forecasts on how the future might unfold for the companies you invest in. Using this information, you can perform ratio analysis with hypothetical numbers and gain insight into how projects may affect the value of your investment.
While it is important to know what the company’s management has planned, it is crucial to view these projections with skepticism. No one can predict the future, and managers (even with the best intentions) may use overly optimistic assumptions in their Pro Forma financial statements. Therefore, you should also consider the possibility of less optimistic outcomes.
Source:
https://www.thebalancemoney.com/what-is-pro-forma-5197732
“`css
}@media screen and (max-width: 480px) {
.lwrp.link-whisper-related-posts{
}
.lwrp .lwrp-title{
}.lwrp .lwrp-description{
}
.lwrp .lwrp-list-multi-container{
flex-direction: column;
}
.lwrp .lwrp-list-multi-container ul.lwrp-list{
margin-top: 0px;
margin-bottom: 0px;
padding-top: 0px;
padding-bottom: 0px;
}
.lwrp .lwrp-list-double,
.lwrp .lwrp-list-triple{
width: 100%;
}
.lwrp .lwrp-list-row-container{
justify-content: initial;
flex-direction: column;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: 100%;
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
“`
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
};
}
Leave a Reply