Video: Pro Forma Financial Statements

In this lesson, dive into the intricacies of pro forma financial statements with Nick Palazzolo, CPA, who unpacks the purpose and structure of these forward-looking documents. Discover how they differ from standard financial statements by representing future projections and learn how to distinguish them through their special "pro forma" stamp. Nick takes you step-by-step through the preparation of pro forma income statements, drawing from operating budgets, and illustrates how to construct the pro forma balance sheet using data from the cash budget alongside other relevant accounts. He also explains the formulation of the pro forma statement of cash flows, showing how it ties together information from both the income statement and balance sheet to reflect expected cash movements for future periods.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Okay, here we are. Financial budgets pro forma financial statements. These financial statements look the same as normal financial statements with the exception that they are pro forma and they'll have that stamped all over them so no one confuses them with actual and they contain future projected data. Now if you sit back and think about it for a second, you probably should be able to tell that these are pro forma because the time period in question probably hasn't happened yet. Although if time has passed and these are sitting around now, you could say, okay, this is for, you know, 2020 to 2030, right?

And if you are watching this in 2030, then dang, I'm just surprised that we're still going that strong now. I'm just joking here. Right. So pro forma financial statements predict the future pro forma income statement. This includes information from the operating budgets.

So Sales, Production, SGNA, all those budgets that we've seen so far are going to flow to the pro forma income statement, the Pro forma balance sheet. This includes information from the cash budget and any other balance sheet accounts. So there we are and the pro forma statement of cash flows derived from the budget income statement and balance sheets. The difference between current and previous statements. Anyone performing a normal cash flow statement, right?

Just kind of that process that you would do. Think back to FAR and your statement of cash flows. If you've taken FAR already, you've got those differences in the accounts, the increases or decreases in accounts here, then we are reconciled to the cash budget. This is the last pro forma statement to be produced, such as it's the last financial statement to be produced if these were using actual accounts.

So just an example here.

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