Concepts Behind Pro Forma Income Statement
Pro forma in Latin refers to or means 'for the sake of form' is a type of statement which is issued by a business concern to declare the manner in which the establishment is projecting its values. The figures of accounts projected in a Pro forma Income Statement ultimately show the actual earnings of the concern and bring out its financial position. Also the Pro forma Income Statements are those which are projected for the next fiscal year, with statements of Balance Sheet, Income and Cash which comes into the business being depicted. Certain transactions that are involved in a company like shares trading, mergers, and changes in the terms of assets or capital invested in the company and any new borrowings or debts of the company are also extrapolated in formal terms. If any projected transaction has been completed in a projected manner such that it would lead to profits for the establishment, the Pro forma Income Statement would include that in the current fiscal year and project it as the company's earnings. The manner in which the Pro forma Income Statement records each and every transaction is vital for analyzing the overall profit of the company by establishing its income pattern.
An example of Pro forma Income Statement takes into consideration the expenditure from the regular income of the concern in terms of tax payment, expenditure on regular revenues to be paid and also employer encumbrance so that these expenditures are deducted from the projected income of the concern to arrive at the actual income which is represented in the Pro forma Income Statement. The total income of the previous year is brought forward and it is added to the income of the current year after deducting cost of salaries and wages, business costs like cost for advertisements, other expenses like loans, and so on. There are two sections which are mandatorily included in the Pro forma Income Statement, the first being the Operating Section which may include certain criteria of the business which are under day-to-day transactions like sale of goods, income from the sale of goods, expenses in the form of maintenance of man power and machinery and other forms of income for the business like appreciation of assets and expenditures like depreciations. The Non-Operating System as the name suggests includes those which are not included in the daily business turnover and consists of Income Tax payments, Finance Costing for the business in terms of payments to lawyers, chartered accountants, and so on, any foreign exchange loss that may occur and other expenses incurred accidentally by the business due to change in Government policies. It is deemed the responsibility of the Accounts Manager in a larger business establishment to oversee the Pro forma Income Statement of the company, while in a smaller establishment the proprietor follows up the task of presenting a perfect Pro forma Income Statement.
Difficulties Encountered In Pro Forma Income Statement
With a wide range of aspects starting from deduction of taxes paid and salaries of employees to liabilities, and addition of all sources of income in a business, the Pro forma Income Statement is a cumbersome task with regard to students who have been inducted into the task recently. Students also tend to leave out or exclude certain aspects of the business which should be included in the Pro forma Income Statement like goodwill obtained by the income which should be included as part of the income, amalgamation of companies which may either result in profit or loss depending upon the liabilities and assets incurred, and depreciation of assets which is considered under loss, and so on. They are also confused whether to include certain categories under assets or liabilities, thus are unaware of whether they generate income or incur loss for the concern. It should be understood that the Pro forma Income Statement is more of a hypothetical one prepared in advance and therefore it does not reflect the exact position of the concern. Only a proper balance sheet of the company is required to know the financial position.
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