There are three main pro forma financial statements that businesses prepare. These are the pro forma income statement, balance sheet and cash flow statement. The pro forma income statement is prepared first, followed by the pro forma balance sheet and finally, the pro forma cash flow statement.

What is pro forma statement of financial position?

In financial accounting, pro forma refers to a report of the company’s earnings that excludes unusual or nonrecurring transactions. Excluded expenses could include declining investment values, restructuring costs, and adjustments made on the company’s balance sheet that fix accounting errors from prior years.

What is the use of a pro forma income statement?

Pro forma financial statements incorporate hypothetical amounts, forecasts, or estimates, built into the data to give a “picture” of a company’s profits if certain nonrecurring items were excluded. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices.

How do you construct an income statement?

To prepare an income statement generate a trial balance report, calculate your revenue, determine the cost of goods sold, calculate the gross margin, include operating expenses, calculate your income, include income taxes, calculate net income and lastly finalize your income statement with business details and the …

What is included in a pro forma?

When to prepare a pro forma income statement?

This should, ideally, be done before year’s end. You will need to estimate final sales and expenses for the current year to prepare a pro forma income statement for the coming year. Let’s assume that you expect sales to increase by 10 percent next year. You multiply this year’s sales of $1,000,000 by 110 percent to get $1,100,000.

How to calculate your pro forma gross profit?

To figure your pro forma gross profit for next year, subtract the pro forma cost of goods sold from the pro forma sales. Thus, $1,100,000 minus $550,000 equals your gross profit, or $550,000. This is, of course, a very simple example. What you really want to do is take into consideration everything possible to project sales.

What are the pro forma expenses for next year?

Your pro forma salaries for next year will be $210,000 and your pro forma expenses will be $105,000. You then figure your pro forma total expenses by adding pro forma salaries and pro forma other expenses together.

How to create a pro forma balance sheet?

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.” The balance sheet will project changes in your business accounts over time.