Through the projected financials, companies are able to analyze risk, make projections of the results of the current accounting period, and also foresee investment opportunities. While it’s helpful to know what a company’s management has planned, it’s important to view these projections with skepticism. Nobody can predict the future, and managers might use overly optimistic assumptions in their pro formas. Another important thing to remember when preparing pro forma statements is to use credible data and not over-rely on hypothetical information, so your estimates are as close to accurate as possible. Taylor suggested starting the process with actual data that has been audited , or at a minimum have been validated as accurate.
Therefore, it prepares a projected balance sheet, income statement, and statement of cash flows for each of the three financing options. These projected financial statements are referred to as pro forma financial statements.
Pro-Forma Statement of Cash Flow
The historical condensed financial statements are derived from the historical financial statements of X Company, which were audited by us, and of Y Company, which were reviewed by other accountants, appearing elsewhere herein . A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management’s assumptions, the pro forma adjustments and the application of those adjustments to historical financial information. The pro forma column does not reflect the proper application of those adjustments to the historical financial statements.
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While all this is happening, it appears on paper that your business is operating at a loss. According to Russell’s pro forma financial statements projections, he reaches the highest earnings when he hires a full-time administrative assistant.
- After you create pro forma financial statements to inform a business decision, run a pro forma analysis to assess your company’s profitability.
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- Matters that may be considered include accounting principles and financial reporting practices followed, transactions between the entities, and material contingencies.
- Costs of goods sold are the costs a business incurs to purchase the product they are selling.
- The authors and reviewers work in the sales, marketing, legal, and finance departments.