How to Create a Pro Forma Income Statement ?

Pro Forma Income Statement

Do you want to know how to create a pro forma income statement? As well as how to calculate a pro forma income statement? Or even what is a pro forma income statement? Well, here we will study the detailed steps involved in the process of pro forma income statement formation.

  • What is pro forma?

The word pro forma basically depicts a future or projected income statement, although the word pro forma is a Latin word which means “for form” or say “as a matter of form”, which states it is a technique that is used for calculating financial results. So, this pro forma depicts valued financial evidence that is hard to be retrieved by the standard financial reports, and forecast the upcoming financial activity.

  • What is a pro forma income statement?

Pro Forma Income Statement is also known as pro forma profit and loss Statement as this income statement takes into account whether certain assumptions such as non-recurring items, restructuring costs, etc were excluded while computing the pro forma profit and loss statement or not.

Although, in terms of accounting, pro forma statements can be depicted as financial reports that are prepared for the purpose of business and are based on proposed scenarios. Here in, your pro forma income statement shows sales of the business. 

The Pro forma financials does not use standard generally accepted accounting principles (GAAP) and in relation to this does not include one-time expenses which are part of company operations. So, a pro forma financial statement is typically based on what companies believe to be included in it or not to be included to measure the company’s performance.

  • Pro forma income statement definition:

The pro forma income statement definition can be stated as a statement that depicts financial reports that are prepared for the purpose of business and are based on proposed scenarios. 

  • Types of pro forma:

Based on presumptions and projections we prepare 3 types of pro forma statements; these 3 statements are related to each other and the assumptions used in one statement should be applied to all financial statements. So, the 3 statements are as:

  1. Pro forma income statements
  2. Pro forma balance sheets
  3. Pro forma cash flow statements

Now, let us discuss the three major types of pro forma statements:

1. Pro forma income statements

The pro forma income statement is the first one to be prepared before making Pro forma balance sheet and Pro forma cash flow statement. As the data in the pro forma income statement is taken to be noted down in the other 2 statements. It tells the analyzer about the total projected income of the business in 3 sections.

  • First section: sales revenue
  • Second section: costs of selling goods and services and
  • Third section: daily expenditure of the business.

Further, a pro forma income statement can also be divided into two types as follows:

  • Pro Forma of Historical Profit and Loss Statement
  • Pro forma projections of Income

2. Pro forma balance sheets

Pro forma balance sheets are second to be prepared in the list of 3, as it depends upon the information of the Pro forma income statement. So, it is prepared after Pro forma income statement telling us about the probable liability and assets of the company. Where we have, the current and the non-current projected assets in the assets side of the Pro forma balance sheet and the predictable equity of the business as well as the predictable equity of the owner of the business in form of capital is mentioned on the liability side of the Pro forma balance sheet.

3. Pro forma cash flow statements

the pro forma cash flow statement is the last in the list of 3 to be prepared as the cash that inflows and outflows in the company or business are totally dependent upon figures from both the pro forma income statement as well as from the pro forma balance sheet. Where as in the preparation of the pro forma cash flow statement one method from the two methods is followed which are as:

  • Direct Method
  • Indirect Method
  • Pro forma income statement example:

Example 1: Suppose we are given with the information of RTF Ltd company as:

1 Sales $ 200,000
2 Cost of Goods Sold $ 10,000
3 Administrative Expenses $ 50050
4 Depreciation $ 4,000
5 Interest Expense $ 230
6 Taxes $ 450

You need to calculate the Net Income of RTF Ltd company.

Solution:

Calculation of Net Income of RTF Ltd company

Sales $ 200,000
+ Cost of Goods Sold $ 10,000
+ Administrative Expenses $ 50050
+ Depreciation $ 4,000
Earnings Before Interest and Taxes $ 135950.00
Interest Expense $ 230
Taxable Income $ 135720.00
Taxes $ 450
Net Income $ 135270.00

So, the Net Income of RTF Ltd company is $ 135270.00. 

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  • Pro forma templates

Here we mention down pro forma income statement template or sample pro forma income statement as well as pro forma cash flow statement and pro forma balance sheet.

  • Pro forma income statement sample:

Profit and Loss Projection (Also known as Income Statement) for CVB Ltd.
2020 (current) $ 2021 $ 2022 $
Sales Revenue 30,000 38,000 48,000
Cost of Sales (10,000) (19,000) (24,000)
Gross Profit 20,000 19,000 24,000
Operating Expenses
Rent 2,000 1,000 1,000
Web hosting 340 600 600
Advertising 5,000 4,000 5,000
Total Operating Expenses (7,340) (5,600) (6,600)
Operating Income 12,660 13,400 17,400
Net Income (Gross Profit – Total Operating Expenses) 12,660 13,400 17,400
  • Pro forma cash flow statement sample:

pro forma cash flow statement for CVB Ltd.
2020 (current) $ 2021 $ 2022 $
OPENING BALANCE 16,000 17,000 19,000
CASH RECEIVED FROM
Donors 85,000 87,000 92,000
Souvenir Shop 1,000 900 800
Total Cash Received 86,000 87,900 92,800
CASH PAID FOR
Materials 34,000 36,000 37,000
Lease 24,000 24,000 24,000
Income Tax 8,000 8,600 8,800
Total Cash Paid 66,000 68,600 69,800
Net Cash Flow Operations 20,000 19,300 23,000
  • Pro forma balance sheet sample:

pro forma balance sheet for CVB Ltd.
2020 (current) $ 2021 $ 2022 $
ASSETS
Current Assets
Checking Acct. 13,000 16,000 19,000
Savings Acct. 35,000 41,000 45,000
Accounts Receivable 4,000 2,000 2,000
Inventory 14,000 17,000 21,000
Total Current Assets 66,000 76,000 87,000
NON-CURRENT ASSETS
Video Equipment 14,000 14,000 14,000
Car 19,000 19,000 19,000
Total Non-Current Assets 23,000 23,000 23,000
Total Assets 99,000 100,000 120,000
LIABILITIES & EQUITY
Current Liabilities
Accounts Payable 20,000 19,000 21,000
Line of Credit 21,000 19,000 18,000
Total Current Liabilities 31,000 28,000 29,000
Non-current Liabilities
Loan 40,000 36,000 32,000
Total Liabilities 81,000 74,000 71,000
EQUITY
Owner’s Capital 35,000 35,000 35,000
Retained Earnings 45,000 56,000 65,000
Total Equity 80,000 91,000 100,000
Total Liabilities & Equity 161,000 165,000 171,000

Here, pro forma income statement and balance sheet are the 2 important statements in 3 of the statements. 

  • A Pro-forma income statement uses:

Some of the common uses of pro forma income statements can be stated as follows.

  1. Forecasting and Control
  2. Financial Modeling
  3. Data collection
  4. Reporting

So, let us discuss these Pro-forma income statement uses in brief.

1. Forecasting and Control

For the purpose of estimation of future sales and budgets, a business uses a Pro-forma income statement by setting it up as a planning tool for the future operations of the business. The pro forma income statement can even monitor and control the actual performance of the business in the long run.

2. Financial Modeling

By using the pro forma statement, a business or a company can make a summary of all the incomes and expenses, helping the company or business in the decision making process. By using financial modeling the company can estimate the income and costs of a business as well.

3. Data collection

The data relevant to the business is collected and used for the purpose of measuring the company’s overall performance, by preparing pro forma statements.

4. Reporting

pro forma financial statements can be used by the investors, traders, creditors, etc which tells about the report of the company’s working as well as the company can also understand about the accounting policies of the business that they need to amend.

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  • How to create a pro forma income statement?

Pro Forma Income Statement is easy to create just by using business information. Therefore, in developing the pro forma income statement, we follow four important steps:

  • Step 1: Calculation of Sales
  • Step 2: Calculation of Gross Profit
  • Step 3: Calculation of Operating Expenses
  • Step 4: Calculation of Net Income

So, let us discuss these pro forma income statement steps in detail.

  • Step 1: Calculation of Sales

Firstly, we calculate the sales of a business or a company by estimating the cost that is involved in sales it includes the COGS as well as the labor cost or direct cost associated with sales. So, in the very first step of preparing a pro forma statement, we calculate the total cost of sales associated with the business. 

  • Step 2: Calculation of Gross Profit

The second step is to find out the Gross Profit, which is calculated by subtracting the total cost of sales of the business by the actual sales of the business. 

  • Step 3: Calculation of Operating Expenses

In the third step, we find out the Operating Expenses of the business by taking into account all the expenses that are incurred by the company or business including rent, electricity, etc. 

  • Step 4: Calculation of Net Income

The last step is the Calculation of Net Income, where the total operating expenses that we have calculated in the third step are subtracted from the Gross Profit that we have calculated in the second step to finding out our Net income of the business. 

These all were the pro forma income statement steps that are followed up in creating the statement of a company or business.

  • How to create a pro forma financial statement?

Pro Forma Financial Statement is also easy to create just by using business information and details mentioned in the 3 pro forma statements, we can develop the pro forma financial statement, we follow four important steps:

  • Step 1: Calculation

In the very first step, all the detailed information of the company or business regarding revenue projections must be noted down and calculations should be made so that average annual revenue can be determined.

  • Step 2: assets and liability

In the second step, the projected assets that include current and non-current assets, as well as the liability that includes current and non-current, must be projected cautiously.

  • Step 3: Cashflow assessment

In the third step, we need to access the stocks, dividends, sales investments that lead us to the company’s or business cash flow that we need to record in all.

  • Step 4: chart of accounts

The last step is to prepare a chart where the performance is measured based on monthly, yearly, bi-annually, etc.

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  • How to create a pro forma income statement in excel?

pro forma income statement in excel is easy to create just by using business information. Therefore, in developing the pro forma income statement in excel, we follow four important steps:

  • Step 1: Calculation of Sales
  • Step 2: Calculation of Gross Profit
  • Step 3: Calculation of Operating Expenses
  • Step 4: Calculation of Net Income

So, let us discuss these pro forma income statements in excel steps in detail.

  • Step 1: Calculation of Sales

Firstly, we calculate the sales of a business or a company by estimating the cost that is involved in sales it includes the COGS as well as the labor cost or direct cost associated with sales. So, in the very first step of preparing a pro forma statement, we calculate the total cost of sales associated with the business.  

A B C
1 Sales 5,00,000 5,00,000
  • Step 2: Calculation of Gross Profit

In the second step is to find out the Gross Profit, which is calculated by subtracting the total cost of sales of the business by the actual sales of the business. 

A B C
1 Sales 5,00,000 5,00,000
2 Cost of Sales
3 Materials  1,00,000
4 Labour  50,000 =SUM(B3:B4)
5 Total cost of Sales
6
7 Gross Profit  =C1-C4

Result of Gross Profit calculation in excel

A B C
1 Sales 5,00,000 5,00,000
2 Cost of Sales
3 Materials  1,00,000
4 Labour  50,000 1,50,000
5 Total cost of Sales
6
7 Gross Profit  3,50,000
  • Step 3: Calculation of Operating Expenses

In the third step we find out the Operating Expenses of the business by taking into account all the expenses that are incurred by the company or business including rent, electricity, etc. 

A B C
8
9 Operating Expenses:
10 Salary 40,000
11 Rent 5000
12 Insurance 2000
13 Fees 1200
14 Repair 1800 =SUM(B10:B11:B12:B13:B14)
15
16 Total Operating Expenses =SUM(B10:B11:B12:B13:B14)

Result of Operating Expenses calculation in excel

A B C
8
9 Operating Expenses:
10 Salary 40,000
11 Rent 5000
12 Insurance 2000
13 Fees 1200
14 Repair 1800 50,000
15
16 Total Operating Expenses 50,000
  • Step 4: Calculation of Net Income

Last step is Calculation of Net Income, where total operating expenses that we have calculated in the third step is subtracted from the Gross Profit that we have calculated in the second step to find out our Net income of the business. 

A B C
1 Sales 5,00,000 5,00,000
2 Cost of Sales
3 Materials  1,00,000
4 Labour  50,000 1,50,000
5 Total cost of Sales
6
7 Gross Profit  3,50,000
8
9 Operating Expenses:
10 Salary 40,000
11 Rent 5000
12 Insurance 2000
13 Fees 1200
14 Repair 1800 50,000
15
16 Total Operating Expenses 50,000
17
18 Net Income  =C7-C16

Result of Net Income calculation in excel

A B C
1 Sales 5,00,000 5,00,000
2 Cost of Sales
3 Materials  1,00,000
4 Labour  50,000 1,50,000
5 Total cost of Sales
6
7 Gross Profit  3,50,000
8
9 Operating Expenses:
10 Salary 40,000
11 Rent 5000
12 Insurance 2000
13 Fees 1200
14 Repair 1800 50,000
15
16 Total Operating Expenses 50,000
17
18 Net Income  3,00,000

Here, above we have studied how to calculate pro forma income statement by taking figures for the calculation of the same.  

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  • Pro forma income statement calculator:

You can also use pro forma income statement calculator for calculating the net profit and gross profit in the business. And to analyse the company or business position in the market. 

Frequently Asked Questions

  • What is a pro forma financial statement?

a pro forma financial statement depicts the company’s earnings in which nonrecurring transactions are not included. Here in, all the statements i.e., pro forma income statement, pro forma cash flow statement, and pro forma balance sheet statement is prepared. 

  • What is a pro forma statement?

The word pro forma basically depicts a future or projected income statement, although the word pro forma is a Latin word that means “for form” or say “as a matter of form”, which states it is a technique that is used for finding out and calculating financial results. Pro Forma Income Statement is also known as pro forma profit and loss Statement as this income statement takes into account whether certain assumptions such as non-recurring items, restructuring costs, etc were excluded while computing the pro forma profit and loss statement or not.

  • How do you prepare a pro forma financial statement?

A pro forma financial statement is prepared by calculating gross profit and total operating expenses. The steps for preparation of a pro forma financial statement are as:

  • Step 1: Calculation
  • Step 2: assets and liability
  • Step 3: Cashflow assessment
  • Step 4: chart of accounts

Conclusion:

By using Pro Forma Income Statement an investor, as well as a business person, can easily predict and analyze the performance of the company or business. Pro Forma Income Statement is also known as pro forma profit and loss Statement as this income statement takes into account whether certain assumptions such as non-recurring items, restructuring costs, etc were excluded while computing the pro forma profit and loss statement or not. Here, we have also studied the detailed steps involved in the process of pro forma income statement formation with pro forma income statement template free, and also have seen the calculation of the same with pro forma income statement calculator.

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