Hypothetical financial statements, drafted to illustrate the potential effects of an acquisition, public offering or other occurrence.
Every parent of a teenager knows that when a teenager gets in trouble, there will be at least one refrain of “But if (this) hadn’t happened, (this) would not have been a problem!” present in that teen’s explanation of what led to his or her misbehavior/poor judgment/rules infraction, etc. Pro Forma Financial Statements serve a somewhat similar purpose when corporations are trying to explain their financial statements to interested parties. These documents contain either past or future hypotheticals in an effort to explain why a single factor/occurrence/misstep, etc. does or does not allow for an accurate assessment of that corporation’s operations and finances.
As these statements have hypotheticals built into their data sets, it is important to assess their accuracy with a grain of salt. Yes, placing certain elements (especially one-time expenses, outlier occurrences, etc.) in context is helpful when companies fear that their data is being skewed by an anomaly. However, financial data is surprisingly easy to manipulate if it does not simply report accurate numbers. Context is important but so is accuracy. Both critical factors should be kept in mind when assessing any corporate or investment data.
Teen: “May I have $20 to put gas in the car?”
Mom: “You know that our agreement requires you to pay for gas out of your earnings from your weekend job. That is your contribution to the household and in exchange, we let you drive the car and keep the job even though we think your time would be better spent studying.”
Teen: “Yes. True. But as you can see on this pro forma financial statement I just drew up, if I hadn’t opted to buy my own prom dress, I would have had money for gas. I paid for a bigger ticket item without being asked, so I believe I deserve help with the gas just this once.”
Mom: “You paid for your prom dress because I wouldn’t buy you one that has a slit all the way up to your hip.”
Teen: “That’s really not the point of the pro forma financial statement, mom.”