Additionally, pro forma statements can be misleading if based on unrealistic or overly optimistic assumptions, and users need to scrutinize their underlying premises carefully. Adjustments made to GAAP statements to create pro forma statements include litigation costs, restructuring charges, and other nonrecurring items. A company that wishes to inform its investors about these things, and their impact on the bottom line, prepares a pro forma income statement to adjust GAAP earnings for any litigation gains or losses. Unlike GAAP's emphasis on historical transactions, a company can use pro forma statements to show projections of its earnings, too. While pro forma statements provide valuable insights for companies’ internal management, their usefulness is limited for external decision-making by investors or other stakeholders. These statements often focus on estimates and projections, rather than actual financial data, which can result in an unclear picture of a company’s performance.

Pro forma invoices

• Because this is a nonrecurring item, the company subtracted this gain from its operating revenues in its pro forma income statement, to report a "non-GAAP operating income" of $2.7 billion.
• Understanding pro forma financial statements involves various components, such as income statements, balance sheets, and statements of cash flow.
• Pro forma statements also allow companies to project future earnings or anticipated income, instead of just reporting results from the past.
• Pro forma invoices streamline the sales process by limiting additional back-and-forth after a transaction is intiated, as all terms have been defined upfront.
• For example, if the buyer is not satisfied with the price, quantity, or delivery timeline, they can contact the manufacturer to reach a mutually-satisfactory conclusion.
• However, a company might abuse pro forma statements by excluding certain charges that really do belong in the financial statements.

Despite their limitations, pro forma financial statements have a place in financial planning and forecasting. However, recognizing their limitations and staying cautious in the decision-making process is key to fully leverage their value while avoiding potential pitfalls. Before acquiring another business, investing in new equipment, or taking on new debt, businesses draft forward-looking pro forma financial statements to understand the effect.

Business Planning and Budgeting

However, a company might abuse pro forma statements by excluding certain charges that really do belong in the financial statements. Occasionally, pro forma financial statements refer to a forecasting method under which financial numbers from the previous two or three years are used. The company's management prepares pro forma financial statements for mergers and acquisitions proposals as well as loan applications.

What Is a Pro-Forma Forecast?

Pro-forma earnings may be either higher or lower than GAAP earnings, but typically they are higher. A firm may use a pro forma invoice if the terms of the sales contract specify that full payment is not due until the buyer receives certain goods. However, some companies have been known to abuse this practice by repeatedly excluding items that should normally be included.

For example, if the buyer is not satisfied with the price, quantity, or delivery timeline, they can contact the manufacturer to reach a mutually-satisfactory conclusion. A pro forma invoice is used by a seller to communicate to a buyer the expected costs, fees, and date of delivery for an order. This transparency can help the manufacturer avoid any misunderstandings when the order is proforma example delivered. The pro forma invoice represents an estimate of the costs that the buying party should expect to pay. Businesses in virtually all industries use pro forma invoices to satisfy their internal purchase approval process. Pro forma invoices streamline the sales process by limiting additional back-and-forth after a transaction is intiated, as all terms have been defined upfront.

What distinguishes pro forma financial statements from prospective financial statements?

Pro-forma earnings are not in compliance with standard GAAP methods and are usually higher than those that comply with GAAP. The term may also refer to projected earnings included as part of an initial public offering or business plan (in Latin pro forma means "for the sake of form"). For example, in its fiscal year 2021 annual report, Best Buy (BBY) noted a $21 million price-fixing litigation settlement, received in relation to products purchased and sold in prior fiscal years.

To demonstrate this potential good fortune on the company's financial statements, XYZ Company may draw up pro-forma financial statements that show the predicted effects of lower costs and increased sales on the company's financial situation. Pro-forma forecasts made off of the assumption that this patent will be granted might show larger than normal yearly sales increases as XYZ Company steals market share from its less technologically advanced and more expensive competitors. A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP. As a result, they often reflect the best-case scenario, which the firm would like to portray to investors. In the U.S., the generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB).

• Creating a variety of hypothetical scenarios can help gain insight into the potential financial impacts of different decisions, risks, and opportunities.
• Pro-forma earnings may be either higher or lower than GAAP earnings, but typically they are higher.
• It is also important to keep in mind that the SEC (Securities and Exchange Commission) requires companies to provide a thorough and compliant pro forma financial information when significant business combinations or real estate transactions occur.
• A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP.
• Still, pro forma financials are not regulated to the same extent as historical financial statements.

• Pro-forma forecasts made off of the assumption that this patent will be granted might show larger than normal yearly sales increases as XYZ Company steals market share from its less technologically advanced and more expensive competitors.
• Pro-forma earnings may exclude items that don't normally occur as part of normal operations, such as restructuring costs, asset impairments, and obsolete inventories.
• "We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance," the company says.
• If they are granted the patent, they will be the only company that can use this new technology for 10 years.
• A pro forma invoice also provides the buyer with an opportunity to negotiate the terms before delivery.

Understanding a Pro-Forma Forecast

• For example, in its fiscal year 2021 annual report, Best Buy (BBY) noted a $21 million price-fixing litigation settlement, received in relation to products purchased and sold in prior fiscal years.
• The pro forma financial statement is often a more accurate representation of the company's financial results and position.
• Pro forma is a Latin term that means “for the sake of form” or “as a matter of form,” but in modern parlance, it has come to mean a standard document, form, or financial statement.
• A pro forma financial statement allows a company to exclude special nonrecurring gains or losses, like a legal settlement, merger-related expenses, or spinning off a division.
• Building accurate pro forma financials requires an in-depth financial analysis of your present business.