Definition: Pro forma financial statements are preliminary financials that show the effects of proposed transactions as if they actually occurred. In other words, these are mock-up financials that are used by management to estimate what the company performance would look like if proposed events actually happened in the future.
What Does Pro Forma Financial Statement Mean?
Pro forma financial statements a lot like budgeted statements. Management can estimate what the business activity will be like in the next period, create a proposed journal entry to record the estimated activity, and produce a set of financial statements that will reflect the proposed events.
Take three quarter interim financials for example. These statements only reflect the business events that happened between January and September. At the end of September, however, management might was to forecast what the end of the year performance results will look like. So they estimate the fourth quarter’s results based on the prior year’s final quarter and add this to the three quarter interim statements. The result is a full year pro forma statement that reflects the estimates for the full year.
Management can also simply roll financials over from one year to the next and alter the pro formas slightly for planning purposes. For example, management might anticipate expenses remaining the same next year, but income increasing by 20 percent. They can create a pro forma statement to show the effects of these changes on the overall profit of the company by simply rolling the current year’s financials to the next year and increasing revenues by 20 percent.
As you can see, this is a great way for management to plan future activities and change current processes to ensure future performance is optimal. Many times an additional column is added to the accounting worksheet for the proposed entries that go into these mock-up statements.