Current assets include cash, accounts receivable, and inventory, while non-current assets encompass property, plant, equipment, and intangible assets. Luckily, we already have the existing debt balance, as it’s the most recent value reported by the balance sheet. This step wraps up the explanation of our first section, and the only thing left is to add it all together for our total Law Firm Accounts Receivable Management current assets. The last step we take is multiplying the percentage and forecasted sales to determine the projections for receivables.

Key Components and Data Required

• Current assets represent resources that a business expects to use some time over the next 12 months.
• It turns out the new dishes we just bought have a useful life of five years, so we’ll divide the purchase value by five.
• This reliance can lead to poor financial decision-making, especially if actual performance diverges from the projected figures.
• They are created using assumptions about future values and conditions, which serve to forecast financial performance over a period that has not yet occurred.
• These include business planning and budgeting, funding and investment attraction, and mergers and acquisitions.

Companies are generally prohibited from creating misleading or fraudulent pro forma financial statements. Still, there may be some gray areas, so use caution when relying on future projections. You may be wondering why we calculated the interest, as we didn’t use it, and that’s very astute of you to notice. We calculated interest because although we don’t explicitly need it now, we do need principal and interest separated to complete the other pro forma financial statements (which we won’t cover right now). A pro forma cash flow statement could detail any payments involved in a hypothetical project.

What Assumptions Should be Considered When Preparing a Pro Forma Balance Sheet?

The first thing we’ll do is divide the total loan amount by the length of the repayment period, which gives us the principal we need to pay each year. Otherwise, how we proceed depends on whether we’re dealing with an existing debt or new debt. A quick Google search for “typical useful accounting life” values should turn up some helpful resources. It turns out the new dishes we just bought have a useful life of five years, so we’ll divide the purchase value by five. First, we’ll divide inventory by COGS to get the percentage (or Googling if we have no data).

How do pro forma financials assist in cash flow forecasting and management?

• For example, if an energy company is planning to build a new power plant, investors may wonder how that project will affect the company’s profits.
• Incorporating a thorough assessment of contingent liabilities ensures a more accurate picture of business viability and aids in prudent financial planning.
• Fraudulent activities may involve manipulating pro forma results to present a rosier financial picture than reality, potentially misleading investors and other stakeholders.
• Pro Forma’s contain running balances for the assets, liabilities, and equity we wish to have in the future.
• Misleading or inaccurate pro forma statements can result in a loss of credibility and trust with stakeholders, making it crucial to approach them with integrity and objectivity.

The only prerequisite before continuing is that you have a basic pro forma balance sheet definition understanding of the balance sheet. If you’re new to the topic, then our previous blog post explaining how to read a balance sheet should be more than enough background. This highly specialized form of forecasting helps you, as a key decision-maker, determine which options are profitable or even viable.

• Furthermore, pro forma statements might not take into account the full range of worst-case scenarios, increasing the risk inherent in making decisions based on these projections.
• We can now add everything up to get total equity, which leaves us with one final task.
• Dive into the nuances of pro forma balance sheets and discover how they can shape your financial future.
• Pro forma financial statements are most useful when analyzing potential business decisions or anticipating the impact of future events.
• The potentially tricky thing, in this case, is if we need to deal with existing depreciation.
• You get access to our consistent team of experts — priced by the hour, so you only pay for what you need.

Explanation of Assets, Liabilities, and Equity Sections

Once we’ve completed this process for each of our long-term liabilities, we just need to add them up for a total. We can then take our total and add it to current liabilities for our total liabilities. The potentially tricky thing, in this case, is if we need to deal with existing depreciation.

As we know, balance sheets contain a running balance of all existing assets, liabilities, and equity for a business. Pro Forma’s contain running balances for the assets, liabilities, and equity we wish to have in the future. In summary, ensuring legal and ethical compliance in pro forma financial statements is crucial to maintain investor confidence and uphold the integrity of financial reports. Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet.