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The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flowsnet revenues and taxes. Consequently, pro forma statements summarize the projected future status of a company, based on the current financial statements.
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 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 covenants such as debt service reserve coverage and debt to equity ratios. 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 returns for a start up business in order to verify cash flow before issuing a loan or line of credit.
Invoices[ edit ] In trade transactions, a pro forma invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices and terms. It is used to declare the value of the trade. It is not a true invoice because it is not used to record accounts receivable for the seller and accounts payable for the buyer.
Simply, a "pro forma invoice" is a "confirmed purchase order" where buyer and supplier agree on detail and cost of the product to be shipped to the buyer. A pro forma invoice is generally raised when the seller is ready for dispatching the material but they want to ensure that the payment is being sent before dispatch.
And similarly, the customer also wants to know which components are included in the pro forma invoice to avoid disagreements later. A sales quote is prepared in the form of a pro forma invoice, which is different from a commercial invoice.
It is used to create a sale and is sent in advance of the commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreementbut because a pro forma invoice is not a legally-binding document, the price may change in advance of the final sale.
A pro forma invoice can also be used for shipments containing items that are not being bought or sold, such as gifts, samples and personal belongings, whereas a commercial invoice is used when the commodities shipped are being bought or sold.
A pro forma invoice is presented in the place of a commercial invoice when there is no sale between the sender and the importer for example, in the case of an RMA for replacement goodsor if the terms of the sale between the seller and the buyer are such that a commercial invoice is not yet available at the time of the international shipment.
A pro forma invoice is required to state the same facts that the commercial invoice would and the content is prescribed by the governments who are a party to the transaction. In some countries, customs may accept a pro forma invoice generated by the importer and not the exporter if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs.
Customs and Border Protectionfor example, uses pro forma invoices to assess duty and examine goods, but the importer on record is required to post a bond and produce a commercial invoice within days from the date of entry.
If the required commercial invoice is needed for statistical purposes, the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer.
Law[ edit ] In lawpro forma court rulings are intended merely to facilitate the legal process indeed to move matters along.
Pro forma audiences are used to obey a formal demand. For example, one pro forma audience may be heard for a judge to order the production of a certain proof or to schedule another date.Description.
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After all, if you are to use such tools to help you then it pays to know everything there is to know about them.