Premium Essay

What Is a Pro Forma Income Statement

In: Business and Management

Submitted By cheeeeese
Words 382
Pages 2
What is the purpose of a Pro Forma income statement?
How would you use the information from the Pro Forma income statement?
Provide an example.

According to businesstown.com, Pro Forma income statements are “an important tool for planning future business operations. If the projections predict a downturn in profitability, you can make operational changes such as increasing prices or decreasing costs before these projections become reality.” Pro Forma income statements are used to let investors know a company’s operating results, conforming to investopedia.com, “Pro Forma financial statements take out one-time charges to smooth earnings.” In addition, “Pro-forma earnings describe a financial statement that has hypothetical amounts, or estimates, built into the data to give a "picture" of a company's profits if certain nonrecurring items were excluded.” (investopedia.com)

The information from a Pro Forma income statement can be used through: * To give investors a clearer view of company operations - This applies to the nature of a business. investopedia.com explains that “Companies in certain industries tend to use pro-forma reporting more than others, as the impetus to report pro-forma numbers is usually a result of industry characteristics. For example, some cable and telephone companies almost never make a net operating profit because they are constantly writing down big depreciation costs.” (businesstown.com) But; * For companies that do not include cash charges, investors can see their actual cash profit. An example from investopedia.com “recall AOL Time Warner's massive goodwill write-off of about $54 billion in 2002 to reflect the value of AOL's merger with Time Warner in the previous year. With accounting charges nearing $100 billion, Time Warner's GAAP earnings for the year probably would not have been a very good predictor of future prospects...

Similar Documents

Premium Essay

Lemos

...Prepare one indirect cash flow statement (operating-investing-financing) for 2004-2005 and a second one for 2005-2006. Do not aggregate any accounts. 2. Calculate common-size income statement for each year. 3. Calculate all financial ratios (use “A Basis Set of Financial Ratios”) for each year. You will always be expected to have all ratios and cash flows statements for all years of data. Coming to class without all if these completed means that you are unprepared for quizzes and class discussions. 4. Identify the major factors influencing Riley’s cash flow. Use the cash flow statements together with the ratios and common-size statements. 5. What is the length of Riley’s cash conversion cycle? Does it take a long time for Riley to go from spending cash to receiving cash? Why? 6. What are the implications of Riley’s cash flow for the financing needs of the firm? Westmoreland Inc. 1. Examine the beginning financial statements (2005) and the pro forma statements (2006 projected) for Westmoreland (Exhibit 1). Do complete ratio, common-size income statement and cash flow statement analyses with these data. The pro forma statements reflect management’s opinion about what will happen in the future. Incorporated into these statements is their business plan. 2. What is Westmoreland’s condition in 2005? 3. What are the key assumptions that are built into Westmoreland’s pro formas? At this point, do not focus on what did happen in the future....

Words: 2069 - Pages: 9

Premium Essay

Proforma Statements

...Pro forma Statements∗ After thoroughly analyzing a company's current situation and the road it took to get there, it is natural to next ask where it is going. The answer will depend on numerous factors including the economic environment, competition, customer tastes, and both strategic and tactical choices. It is the job of the pro forma financial statements to translate these operational forces into numerical estimates of expected financial performance. There are several reasons for projecting future financial performance. First, pro forma statements are very useful when evaluating alternative business strategies. It is one thing to discuss strategy at the conceptual level, but much more valuable to be able to identify the profit and funding effects of alternative strategies. Second, evaluating alternative future events permits explicit measurement of risk. Financial projections do not eliminate the sources of risk. However, they do help the decision‐maker find which risks are important and how realizations of those risks will affect the company. Finally, pro forma statements identify the amount of funds needed and assist in deciding on the appropriate structure for the funding. It is simply not possible to develop an adequate funding plan without relying on pro forma statements. Pro forma statements provide financial estimates of the impact of a business plan....

Words: 5514 - Pages: 23

Premium Essay

Check Point Week 3 Fin 200

...Check Point Financial Forecasting November 12, 2012 The most comprehensive means of financial forecasting is to develop a series of pro forma, or projected, financial statements. Financial forecast is about the pro-forma income statement, cash budget, and pro-forma balance sheet. The statements are often required by bankers and other lenders as a guide for the future. A brand new company needs to have sales projection plan, production plan, and have a pro forma income statement because it is a new business, so it would not have any prior financial reports. If there was a new business that I would trying to open, I would have to know, how much money products are going to cost, how much revenue. I would need to make and what is expected of the business. Family owned company, would need the same thing. It is still treated like a brand new company because you still need financial reports, which are production plan, cash balance and sales projections to get the banks to finance and to know how the bill are going to be paid. A long-standing corporation is a little different because they have been there longer and there are more financial statements. There are pro-forma income statements, cash budget, and other budgets used together equal pro-forma balance sheet are used by business small and large to obtain lending, set production levels, forecast sales, and forecast profits....

Words: 275 - Pages: 2

Premium Essay

Forecasting

...Pro forma income statements, cash budget, and other budgets used together equal a pro forma balance sheet are used by business small and large to obtain lending, set production levels, forecast sales, and forecast profits. What financial forecasting is looking at is the pro forma balance sheet this is the end product of other budgets plans. Pro forma balance sheet shows at a glance assets and liabilities. Businesses use this information to determine gross profits and projected sales income....

Words: 328 - Pages: 2

Premium Essay

Wireless World

...Wireless World Budget Proposal For 2010-2015 BUSN-278 Fall 2010 Professor Rebecca Boling Annie Hogan DeVry University ------------------------------------------------- Table of Contents Section | Title | Subsection | Title | Page Number | 1.0 | Executive summary | | | 3 | 2.0 | Sales Forecast | | | 3 | | | 2.1 | Sales Forecast | 3 | | | 2.2 | Methods and Assumptions | 3 | 3.0 | Capital Expenditure Budget | | | 4 | 4.0 | Investment Analysis | | | 4 | | | 4.1 | Cash flows | 4 | | | 4.2 | NPV Analysis | 4-5 | | | 4.3 | Rate of Return Calculations | 5 | | | 4.4 | Payback Period Calculations | 6 | 5.0 | Pro Forma Financial Statements | | | 6 | | | 5.1 | Pro Forma Income Statement | 6 | | | 5.2 | Pro-Forma Cash flow Statement | 6 | | | 5.3 | Pro-Forma Balance Sheets | 7 | 6.0 | Works Cited | | | 7 | * * * * Wireless World is a retail store that sells strictly wireless products developed and geared towards busy individuals who need their product to match their on-the-go lifestyle. The products sold here include phones, notebooks, netbooks, eReaders, iPads, and other similar wireless products. The target demographic for Wireless World includes adults ranging from early twenties to late forties who lead very active and organized lifestyles. Our target market has an interest in wireless gadgets and the potential they hold....

Words: 1402 - Pages: 6

Premium Essay

Paer Story

...Cash planning requires preparation of the cash budget, while profit planning involves preparation of a pro forma income statement and balance sheet. The text illustrates through example how these budgets and statements are developed. The weaknesses of the simplified approaches (judgmental and percent-of-sales methods) of pro forma statement preparation are outlined. The distinction between operating cash flow and free cash flow is presented and discussed. Current tax law regarding the depreciation of assets and the effect on cash flow are also described. The firm’s cash flow is analyzed through classification of sources and uses of cash. The student is guided in a step-by-step preparation of the statement of cash flows and the interpretation of this statement. This chapter ties in every person’s need to set goals, estimate income, and budget expenditures to the firm’s need to effectively engage in these activities. ( Answers to Review Questions 1....

Words: 5923 - Pages: 24

Premium Essay

Supply Chain Rjct Task 2

...For the first quarter, the pro forma statements showed excess of cash on hand, so the decision was made to deposit a portion of excess cash to be put into a certificate of deposit so it would be generating interest income instead of sitting idle, since the projected revenue from sales and increased costs from marketing would leave ample cash flow for the increase in production capacity planned for the third quarter, even after the opening of the New York and Tokyo sales offices planned for the second quarter. $400,000 was placed in the certificate of deposit for an estimated interest income of $6,000. The initial production capacity investment in this quarter was kept to a minimum at $600,000 due the product cycle being in the research and development phase...

Words: 2085 - Pages: 9

Premium Essay

New World

...Chapter 4 Financial Planning and Forecasting LEARNING OBJECTIVES After reading this chapter, students should be able to: • Briefly explain the following terms: mission statement, corporate scope, corporate purpose, corporate objectives, and corporate strategies. • Briefly explain what operating plans are. • Identify the six steps in the financial planning process. • List the advantages of computerized financial planning models over “pencil-and-paper” calculations. • Discuss the importance of sales forecasts in the financial planning process, and why managers construct pro forma financial statements. • Briefly explain the steps involved in the percent of sales method. • Calculate additional funds needed (AFN), using both the projected financial statement approach and the formula method. • Explain the conditions under which the percent of sales method should not be used. • Identify other techniques for forecasting financial statements discussed in the text and explain when they should be used. LECTURE SUGGESTIONS In Chapter 3, we looked at where the firm has been and where it is now--its current strengths and weaknesses. Now, in Chapter 4, we look at where it is projected to go in the future. The details of what we cover, and the way we cover it, can be seen by scanning Blueprints, Chapter 4....

Words: 6865 - Pages: 28

Premium Essay

Finance Case Study

...Production Schedule 生产计划 Cash Budget 现金预算 Pro-forma income statement Pro-forma balance sheet 预计的利润表 预计的资产负债表 9 Analyses(分析)...

Words: 563 - Pages: 3

Premium Essay

Test

...Production Schedule Cash Budget Pro-forma income statement 预计的利润表 生产计划 现金预算 Pro-forma balance sheet 预计的资产负债表...

Words: 620 - Pages: 3

Premium Essay

Insurance

...BUDGETING Introduction and main points A comprehensive (master) budget is a formal statement of management’s expectations regarding sales, expenses, volume, and other financial transactions of the organization for the coming period. Simply put, a budget is a set of pro forma (projected or planned) financial statements. It consists of a pro forma income statement, pro forma balance sheet, and cash budget. A budget is a tool for both planning and control. At the beginning of the period, the budget is the plan or standard; at the end of the period it serves as a control device to help management measure its performance against the plan so that the future performance may be improved. International Paper, a large forest-products company, uses key budgets, including sales and expense projections, as the starting point for the developing business strategies. Prior to development of the budget, certain questions must be asked and certain assumptions must be made. What will be the inflation rate be? Where is the competition headed? Will suppliers increase prices? Will costumer tastes change? You also must explore the financial alternatives available for you. For instance, what will occur if you raise your selling price? What will be the effect if one variable (e.g., advertising) is changed?...

Words: 1408 - Pages: 6

Premium Essay

Jones Electrical Distribution

...Problems Statement Jones Electrical Distribution’s current condition is not only cash shortage but also under rapid sales grows’ effect. Why this profitable firm needs to increase its borrowing, what kinds of strategies Jones Electrical Distribution will choose, and what his estimate of the loan needs is. These are the problems we will talk about bellows. Data Analysis 1. According to the balance sheet and sources and uses statements (appendix 1), we can see that the line of credit payable increases every year, because Jones needs more and more funds to support the needs of working capital and invest to long-lived assets such as plant, property and equipment to support higher sales levels. We can see that Jones used its profits (changed in Net Worth), cash and short-term debt to support the needs of working capital and the increase of inventory (probably to support higher sales levels). The reduction in long-term debt is a use of funds because Jones is repaying a loan. The decrease of cash is a source of funds to support a higher amount of inventory and prepare to repay the loan. The increase of total net property, equipment and accumulated depreciation is a use, which means Jones used its sources to invest more on plant, property and equipment. 2. Jones Electrical Distribution faces a rapid sales growth but meets the over...

Words: 1166 - Pages: 5

Premium Essay

Chapter 9 Prospective Analysis

...When preparing a projected income statement, which of the following additional information, other then the financial statements would probably not be relevant? A. The competitive environment B. New versus old store mix C. Expected capital expenditure D. Expected level of macroeconomic activity 2. The reliability of a short-term cash forecast depends most heavily on the quality of: A. Cost of goods sold forecast B. Current ratio forecast C. Sales forecast D. Shares outstanding forecast 3. What is the correct order of the following steps in preparing a projected income statement (not all steps may be shown)? I. Project future net sales II. Project future net income III. Project future cost of goods sold IV. Project future interest expense A. I, II, III, IV B. II, IV, III, I C. I, III, II, IV D. I, III, IV, II 4. What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? I. Project future cash II. Project future accounts receivable III. Project future accounts payable IV. Project future property plant and equipment A. I, II, IV, III B. II, IV, III, I C. I, III, II, IV D. I, III, IV, II The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: 50% of sales are made for cash....

Words: 4066 - Pages: 17

Premium Essay

Rjct Task 1

...Miscellaneous Income and Expenses + Other Income 0 0 0 0 - Other Expenses 0 0 0 0 = Earnings Before Interest and Taxes -340,000 -271,913 717,807 5,231,688 + Interest Income 1,500 3,000 3,000 3,000 - Interest Charges 0 0 0 0 =...

Words: 3919 - Pages: 16

Free Essay

Corporate Finance

...Debt Policy at UST Inc. Executive Summary In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand smoke. UST was still criticized at the time for its tardiness with new product introductions and losing its market share to new and smaller competitors. In 1997, instead of cutting product prices to compete, UST introduced new line of lower priced products such as Copenhagen Long Cut and Rooster. UST also renewed its focus on the marketing campaigns, launching promotions and increasing couponing. For years, tobacco industry had been embattled with health related lawsuits. Majority of these litigations were for cigarette companies in comparison to smokeless tobacco industry. Still, UST had seven pending health related lawsuits. UST has historically been one of the most profitable companies in corporate America. Even though S&P rated the debt of many tobacco companies as investment......

Words: 1635 - Pages: 7