Learning objective of Pro forma

As per the required situation, pro forma balance sheets are prepared.

Main objective of Pro forma

Pro forma balance sheets are mainly utilized for summing up the status ofa company based on the planned future transactions. Apart from this, this balance sheet is prepared taking the help of present financial statement.

Key points in this case

  1. If the consideration is taken with respect to business field, preparation of pro forma financial statements is mostly done beforehand. It is generally prepared on the basis of planned transactions. Such transactions are like,
  • Acquisition
  • Change in capital structure
  • New capital investment
  • Issuance of equity
  • Merger
  • Earning new debts
  1. Financial activities of a company have various statements among which pro forma accounting is one.It is usually counted after eliminating non-recurring and unusual transactions. A company makes such statements after calculating and stating their estimated monetary growth.
  • In order to make the figures of pro forma financial statement comprehendible, the labels should be clearly mentioned. A clear labeled figurine means clarity in report and prevention from any kind of deviations.

Simple explanation with examples

It is usually the finance department of a company which prepares the pro forma financial statement. Only after observing and reviewing the complete financial condition of a company the approach is taken.Its preparation mainly affects the materialistic transactions of a company and is based on board and management reviews. Therefore, it can be clearly seen that a business plan followed by a company and reflecting the presumed effect with the help of pro forma financial statements will show its practical financial approach.

 

Proforma of balance sheet” = C

 

With the help of such statements, investors and lenders can confirm or structurize their agreements with debt covenants. Among the debt covenants, 2 are mostly considered.

  • Debt to equity ratios
  • Debt service reserve coverage

 

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