Pro forma financial statements are reports that summarize specific financial activities using a layout approved under the generally accepted accounting principles (GAAP). There are three widely used statements: balance sheet, income statement, and cash flow. All of these typically are included in any formal financial statement production, both for investors and for income tax evaluation.
A balance sheet is designed to provide a summary of the balances in all the different financial accounts. Assets are listed on the left-hand side, and liabilities and owners or shareholder equity is on the right. The totals for each side must match.
Within each section of pro forma financial statements, accounts are broken down into categories based on commonalities. For example, assets will include cash and other liquid assets, fixed assets, and accounts receivable. Liabilities will include any debt and accounts payable. The actual values shown on the balance sheet are based on the balances in the accounts on a specific date, which is listed on the top of the statement.
An income statement is always included in these reports. This document is based on the activity over a specific period of time, typically one year. The report lists the total revenue from all sources and all the expenses related to that income. Revenue is subtracted from the total expenses to provide the net income or loss for the period.
The cash flow statement shows a more detailed breakdown of all the cash and liquid assets. This includes cash in a bank account, short-term investments, cash-able bonds, accounts receivable, and other liquid assets. The purpose of this report is to show the liquidity of the firm, which reflects the total funds available and accessible to the business.
Pro forma financial statements typically are issued at the end of the fiscal year. Prior to this, the accounting department carefully reviews all the report and financial transactions to ensure that all relevant data is included. Timing can be very important in accounting, and leaving out items to report them in the next financial year must be explained in the notes of a financial statement.
All of these statements are typically provided to an auditing firm to form the basis for a financial audit. The firm is responsible for reviewing the financial transactions and providing a written opinion about the accuracy and completeness of the statements. The audited financial statements must include this opinion when provided to external investors, shareholders, or financial institutions.