Forecasts should include the same degree of detail as that required in pro forma data and should clearly set forth any assumptions used. Certain limited circumstances may warrant the use of an interest rate other than the current or committed rate. In some instances, the staff believes that the registrant should use the interest rates that were prevailing during the period covered by the pro forma information. Pro forma financial information is required if acquisitions which are in the aggregate significant have occurred in the latest fiscal year or subsequent interim period, or are probable. See Section 2320 for guidance related to aggregate significance tests for real estate acquisitions. These statements analyze the Company’s financials while considering the best-case and worst-case situations.

To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense. Funds from operations, or FFO, refers to the figure used by real estate investment trusts to define the cash flow from their operations. Companies’ definitions of pro forma vary along with their internal methods for forecasting and making assumptions. For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other. In this case, the company is projecting the future, based on its knowledge of past sales and expenses and factoring in expected changes. 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.

What Information is Included in Pro Forma Financial Statements?

When you make a pro forma income statement, make sure you are as detailed as possible throughout the process. Often, founders are surprised how much pro forma income statement can be advantageous to their startup operations in the foreseeable future. At its core, you have to think of a pro forma income statement as a strategic planning tool to move forward in the right direction. You can also use the benchmark data of the pro forma income statement to find out whether or not you will have above-average sales growth in a given year. Similarly, you can use the data to review and decide whether or not you should spend more on your marketing campaigns in the fall months.

You can use this benchmark data to figure out whether or not you will expect high expenses in the first quarter as opposed to the second quarter of the year. Contrary to misguided perception, https://kelleysbookkeeping.com/ are not reserved for big corporations. In fact, small startups can use pro forma financial statements to understand their current financial value and make calculated future predictions. Estimating a balance sheet is a useful tool for the investors, management and creditors to analyze how the financial position of a company is impacted. Continuing with the above example, where a company takes on huge levels of debt to fund an expansion project, the pro forma balance sheet position will show that the company has become significantly over-leveraged.

Form and Content of Pro Forma Adjustments

The company’s financials are analyzed in these statements, considering the best-case and worst-case scenarios. It gives the financial managers a clearer picture of how various choices might affect the company’s financial stability. Pro forma financial statements present the company’s predicted or current financial information based on several assumptions and speculative circumstances that may or may not have transpired. A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred.

In comparison, conventional financial statements paint the financial situation of the past, whereas a pro forma financial statement, including an income statement, showcases the future financial health of the startup. In creating pro forma income statements, it is advisable to create a revenue model that helps you model out different scenarios with different assumptions. Always sense check assumptions and overall outcomes https://kelleysbookkeeping.com/ to make sure your numbers make sense. The purpose of a pro forma statement is to help management in making informed decisions about certain events or transactions. It allows them to see the possible outcomes of a particular decision and how it will impact the company’s profitability, financial position, and cash flow. The Company may create pro forma statements considering an acquisition/merger of another business/Company.

Pro Forma Income Statement Example

Banks may also use pro forma financial statements when evaluating loan applications. Before interpreting pro forma financial statements, it is important to understand the assumptions underlying them. It is also important to understand any limitations of the statements such as assumptions about sales growth or cost increases.

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. If you don’t know how each of the companies defines its pro forma figures, you may be comparing apples to oranges. A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods. A pro forma invoice is a preliminarybill of salesent to a buyer in advance of a shipment or delivery of goods.