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.
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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.
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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.
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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.
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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:
- Pro forma income statements
- Pro forma balance sheets
- 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
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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.
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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 |
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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 |
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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.
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A Pro-forma income statement uses:
Some of the common uses of pro forma income statements can be stated as follows.
- Forecasting and Control
- Financial Modeling
- Data collection
- 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.
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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.
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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.
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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 |
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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 |
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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 |
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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
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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.
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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.