A pro forma profit and loss statement reflects business activities apart from certain atypical circumstances that may have temporarily influenced business activity or income during the period in question, such as startup costs. Alternately, a pro forma profit and loss statement can be a projection, outlining expected profit and loss during a period that has not yet occurred. In either case, this format is used to present a situation that is not actual fact, either because the atypical circumstances did actually occur or because the period covered by the projection is still in the future.

Evaluating the Numbers

In order to read a pro forma profit and loss statement, you should first take a look at the numbers and consider the overall health of the business. An honest and effectively prepared pro forma income statement should be based on actual accounting numbers that reflect real business activities, such as the amount that a company spends on materials and labor. By evaluating these numbers, you should be able to judge whether the fundamentals of the business are solid or whether the business owners are making elementary mistakes that they need to correct.

Comparing Fact and Fiction

If you have access to an actual profit and loss statement, you should compare it with the pro forma profit and loss statement. Identify the differences between the two documents, such as the items that the business owner is forced to include under standard accounting procedures, but has chosen to leave off of the pro forma statement. These may include restructuring costs, equipment depreciation or costs incurred as a result of an unexpected mishap, such as an extreme weather event.

Questioning Assumptions

You can effectively evaluate a pro forma profit and loss statement by considering not only the information it contains, but also the data that it does not include. Evaluate the relevance of the items that appear on the conventional profit and loss statement, but not on the pro forma version. Assess the owner's or accountant's assumptions in leaving these items off of the pro forma statement. Consider whether these really are one-time, isolated occurrences or whether they are likely to happen again. For example, if the business operates in a region where extreme weather events occur regularly, then you should question the decision to omit costs incurred as a result of such an event, unless the business owner has taken steps to protect the business from such damages in the future, such as upgrading a drainage system.

Source:

Businesstown.com: Pro Forma Income Statements

Investorwords.com: Pro Forma Definition

US Securities and Exchange Commission: "Pro Forma" Financial Information: Tips for Investors