Pro Forma Financial Information
Pro forma financial statements are accounting reports that a company prepares with specific assumptions and projections. In short, these statements are prepared on a "what if" basis. A company's top management typically prepares and reviews pro forma financial statements to meet regulatory requirements, provide information to lenders and creditors, or engage in a merger or an acquisition transaction.
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Function
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Pro forma financial statements provide insight into a corporation's economic standing if some specific events occur. For example, a regulator may require two companies engaged in a merger or an acquisition transaction to provide a pro forma income statement, balance sheet or cash flow statement based on the assumptions that the transaction is successful or that it is not.
Time Frame
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An accountant may prepare a complete set of pro forma financial statements at any time during a year depending on business needs. For example, a lender who reviews a company's loan or overdraft application may request a pro forma income statement for three months and a pro forma cash flow statement for nine months to evaluate liquidity needs.
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Types
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A complete set of pro forma financial statements includes four reports: a balance sheet (or statement of financial position), a statement of income (also known as statement of profit and loss), a statement of cash flows and a statement of retained earnings (also called statement of owners' equity).
Pro Forma Balance Sheet
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A pro forma balance sheet displays a company's financial standing if some business transactions or specific events occur. For example, a N.Y.-based bank interested in purchasing the assets of a Colombia-based European insurance company may prepare a pro forma balance sheet to show regulators and investors its total assets and liabilities after the acquisition.
Pro Forma Income Statement
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A pro forma income statement indicates a company's revenues and expenses under specific circumstances. For example, top management of an insurance company may ask an accounting manager to prepare a pro forma income statement to evaluate changes in premium revenues if the U.S. Congress approves a bill imposing large restrictions on underwriting activities in some parts of the country.
Pro Forma Cash Flow
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A pro forma cash flow statement displays cash receipts and payments from operations, investments and financing activities if specific events occur. For example, a casino operator in Las Vegas, Nevada, may ask a financial analyst to prepare a pro forma cash flow statement to review changes in operating cash receipts if the state Legislature adopts a new gambling law.
Pro Forma Owners' Equity
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A pro forma statement of owners' equity shows hypothetical movements in shareholders' accounts under various scenarios. For example, the Securities and Exchange Commission may ask a utility company to provide a pro forma dividend report if the company merges with a rival.
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References
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- Photo Credit pen showing diagram on financial report/magazine image by Anton Gvozdikov from Fotolia.com
