The Primary Purpose of Pro Forma Financial Statements
Using pro forma financial statements is a way to see how an organization might be affected by a major restructuring project. It can also be used to evaluate the financial impact of key capital investments. It is also a good tool for attracting outside capital.
A pro forma statement is a form of financial statement that includes year-to-date financial data and projections for the rest of the year. These statements are created in advance of a merger, acquisition or restructuring. They can also be used to calculate financial ratios. They are similar to the standard financial statement, but they are based on hypothetical numbers.
They can be created using a Microsoft Excel spreadsheet. The spreadsheet automatically populates the correct entries. However, it is important to keep in mind that past data may not always paint a complete picture in a changing environment.
For instance, a pro forma income statement does not include one-time expenses, such as the purchase of heavy machinery. These expenses can significantly affect net income in the year in which they occur. However, they are not as important in subsequent years. This gives analysts and investors a better picture.
Other than the usual income statement, a pro forma statement can also include liabilities, such as loans and employee pay. It may also include a chart of accounts to centralize financial accounts in a general ledger. The most common financial statements are the income statement, statement of cash flows, balance sheet and statement of changes in equity.