Question

Explain in words the purpose of creating a proforma income statement

Answer 1

The purpose of preparing a proforma income statement is estimate the revenues and expenses that may occur in the future. A proforma income statement can be used for making decisions with respect to future business operations. For Instance, a company can use proforma income statement to project the revenues and expenses that may be associated with a project it expects to undertake in the coming year. With proforma income statement, the company can evaluate the impact of new project on company's resources and its net income Since, projections with respect to sales and operating expenses may be based on an expected growth rate, the proforma income statement also indicates the company's expectations about its future performance.

With the use of proforma income statement, the company can inform the investors and other stakeholders about its future plans in financial terms. For Instance, any major expenses to be incurred in the coming year can be reported in the proforma income statement. Similarly, the company can report a reduction in interest costs if it plans to repay some debt in the proforma income statement. This type of information can help various users of financial statements to understand company's business plans and make assessement of the company's performance for the relevant period.

A proforma income statement can also serve as the basis for evaluating the performance of the company in various areas by comparing actual versus estimated results at the end of the year. The possible reasons for any significant deviations can be identified and taken into account while preparing the proforma financial statements for the upcoming period.