AT Section 401 Reporting on Pro Forma Financial Information

Use this Word template to create your own compilation report, as per the AICPA’s guidance. The applications vary slightly from program to program, but all ask for some personal background information. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Note that this policy may change as the SEC manages SEC.gov to ensure that the website performs efficiently and remains available to all users.

The invoice will typically describe the purchased items and other important information, such as the shipping weight and transport charges. For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other. 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 (SEC) to be fraudulent and punishable by law.

Assessing Potential Mergers

For example, if your company recently acquired or dispensed with another company, the assumptions would be the changes in finance expected. The limitations should discuss the challenges of predicting the financial future of a company. However, the information is affected by outstanding estimated days of sales, or the average number of days that payment has not been made by the customers.

You could deliver to them two sets of pro forma financial statements, and two risk assessment templates to use to discover their best option. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements. Regular income statements, sometimes called statement of financial performance, are exacting, in that they reflect the exact income figures your company had in past years.

Do Startups Need Pro Forma Financials?

Carry out extensive research and review prior financial statements in order to arrive at the best assumptions. Unrealistic assumptions will lead to inaccurate and unreliable pro forma statements. There can be a significant problem with issuing pro forma financial statements to the public, since they contain management’s assumptions about business conditions that may vary substantially from actual events, and which may, in retrospect, prove to be extremely inaccurate.

With pro forma statements, businesses can better make assumptions on what decisions are best for the company, such as labor increases, production increases, or even expansion. Investors should be aware that a company’s pro forma financial statements can hold figures or calculations that do not comply with generally accepted accounting principles (GAAP), the set of standards followed by public companies for their financial statements. All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet. The same holds true for the process of preparing income statements and cash flow statements.

Simply, a « pro forma invoice » is a « confirmed purchase order » where buyer and supplier agree on detail and cost of the product to be shipped to the buyer. A pro forma invoice is generally raised when the seller is ready for dispatching the material but they want to ensure that the payment is being sent before dispatch. And similarly, the customer also wants to know which components are included in the pro forma invoice to avoid disagreements later. The term is used in legal and business fields to refer to various types of documents that are generated as a matter of course. In this way, all of the accounts of the proforma balance sheet can be estimated with the exception of cash, which becomes the final and forced or balancing entry.

Pro Forma Company Income Statements

These are factually supported by the data from the original financial statements. Be advised that issuing pro forma financial statements to the public can be problematic, especially since the pro forma statements and the GAAP statements can vary so widely. Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business. Pro forma financial statements are inherently speculative and do not reflect actual past or present performance.

Fn 25 If the option in footnote 4 to paragraph .07a is followed, the report should be appropriately modified. Fn 22 If the option in footnote 4 to paragraph .07a is followed, the report should be appropriately modified. Fn 19 If the option in footnote 4 to paragraph .07a is followed, the report should be appropriately modified. Fn 17 If the option in footnote 4 to paragraph .07a is followed, the report should be appropriately modified.

Pro forma templates

Using this as a tool, your business can come up with optimistic, realistic, and pessimistic future scenarios for the future of the company. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance. We are unable to perform the examination procedures we considered necessary with respect to assumptions relating to the proposed loan described in Adjustment E in Note 2.

• Now the income statement, balance sheet, and other data can be used to create the statement of cash flows.
• 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.
• The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement, but because a pro forma invoice is not a legally-binding document, the price may change in advance of the final sale.
• A pro forma income statement will show how much a business or company expects to make in sales and revenue, it also highlights forecasted fixed or variable operating expenses and ultimately, shows how much profits and retained earnings can be made at the end of a future financial period.
• Traditionally, business owners search for spreadsheet templates online and create a set of pro forma financial statements based on those templates.

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. GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better thought of as hypothetical earnings. The statements are presented to the company’s management to help it make a decision on a proposed action based on its potential benefits and costs. 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 is a pro forma financial statement?

Pro forma adjustments should be based on management’s assumptions and give effect to all significant effects directly attributable to the transaction (or event). QuickBooks accounting software allows you to create pro forma statements and make changes as needed. You can make pro forma adjustments based on new information and use these statements to find opportunities, reduce risk, and increase profits. Unfortunately, there are also disadvantages that accompany pro forma financial statements. For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting.

To illustrate the process of creating pro forma financial statements, meet Sally, the owner of Centerfield Sporting Goods. Centerfield is a small firm that manufactures baseball gloves, and Sally is creating pro forma reports for the 2021 fiscal year. If you want to plan for upcoming economic changes, you need pro forma financial statements to predict future income, identify and control risks, and secure funding for your business. Big 5 Sporting Goods announced record earnings in the third quarter of 2020, attributing its huge success that quarter to the impact of people’s reactions to the COVID-19 pandemic. With so many people in quarantine still wanting to make healthy lifestyle choices, sporting goods stores were making record sales. The impacts of the pandemic are extremely difficult to predict, making it a challenge for Big 5 Sporting Goods and other companies to assemble pro forma financial statements.

Definition of Pro Forma Financial Statement

Pro forma financial statements are designed to help forecast future expenses and revenues. Notably, they can help determine future prospects and visualize long-term financial outcomes. In creating your pro forma documents, it is advisable to create multiple sets with different scenarios, especially when their purpose is to help make decisions. In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk. For more information on conducting risk analyses and the free templates to do so, see “All the Risk Assessment Matrix Templates You Need.” As an example, your team might need to decide between the acquisition of two separate businesses.

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 outsourcing bookkeeping guide 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.