Editing Pro forma (section)

===Financial statements===
{{further|Financial modeling#Accounting}}

In [[business]], ''pro forma'' [[financial statement]]s are prepared in advance of a planned [[Financial transaction|transaction]], such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new [[debt]] or issuance of [[Capital stock|stock]].

The ''pro forma'' models the anticipated results of the transaction, with particular emphasis on the projected [[cash flows]], net revenues and taxes. 
Consequently, ''pro forma'' statements summarize the projected future status of a company, based on the current financial statements.<ref>{{Cite book | last = Ross | first = Stephen |author2=Wasterfield, Randolph W. | title = Corporate Finance | publisher = McGraw-Hill | year = 2008 | page = 64 | isbn = 978-0-07-310590-1}}</ref> ''Pro forma'' figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained.

For example, when a transaction with a material effect on a company's financial condition is contemplated, the finance department will prepare, for management and [[board of directors|board]] review, a [[business plan]] containing ''pro forma'' [[financial statements]] demonstrating the expected effect of the proposed transaction on the company's financial viability. Lenders and investors will require such statements to structure or confirm compliance with [[debt covenant]]s such as debt service reserve coverage and [[debt to equity ratio]]s. Similarly, when a new corporation is envisioned, its founders will prepare ''pro forma'' [[financial statements]] for the information of prospective investors. Also, banks will request ''pro forma'' statements in lieu of [[tax return]]s for a [[Startup company|start up business]] in order to verify cash flow before issuing a loan or [[line of credit]].