Financial Terms
Pro forma (Proforma)

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Definition of Pro forma (Proforma)

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Pro forma (Proforma)

A set of financial statements that incorporates some assumptions, usually
regarding future events. For example, pro forma statements can be constructed that
extend a company’s financial statements through the end of its fiscal year, and
which contain assumptions regarding the final few months of the year, which have
not yet occurred.

Related Terms:

Adjusted Cash Flow Provided by Continuing Operations

Cash flow provided by operating
activities adjusted to provide a more recurring, sustainable measure. Adjustments to reported cash
provided by operating activities are made to remove such nonrecurring cash items as: the operating
component of discontinued operations, income taxes on items classified as investing or financing activities, income tax benefits from nonqualified employee stock options, the cash effects of purchases and sales of trading securities for nonfinancial firms, capitalized expenditures, and other nonrecurring cash inflows and outflows.

After-tax profit margin

The ratio of net income to net sales.

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

agency problems

Conflicts of interest between the firm’s owners and managers.

Aggregate Production Function

An equation determining aggregate output as a function of aggregate inputs such as labor and capital.

Antidilution Provisions

A clause in a shareholders agreement preventing a company from issuing additional shares, without allowing the current shareholders the opportunity to participate in the offering to avoid dilution of their percentage ownership.

Antifraud Provisions

Specific sections and rules of the 1933 Act and 1934 Act that are
designed to reduce fraud and deceit in financial filings made with the SEC. The antifraud provisions
are Section 17(a) of the 1933 Act and Section 10(b) and Rule 10b-5 of the 1934 Act.

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a budgeted maximum allowable expenditure

Appropriation request

formal request for funds for capital investment project.

approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

Asset substitution problem

Arises when the stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Asymmetric information

Information that is known to some people but not to other people.

Average Propensity to Consume

Ratio of consumption to disposable income. See also marginal propensity to consume.

Average Propensity to Save

Ratio of saving to disposable income. See also marginal propensity to save.

BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.

Base probability of loss

The probability of not achieving a portfolio expected return.

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Before-tax profit margin

The ratio of net income before taxes to net sales.

benefits-provided ranking

a listing of service departments in an order that begins with the one providing the most service
to all other corporate areas; the ranking ends with the
service department providing service primarily to revenueproducing

Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.

Book profit

The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.

business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market


an incidental output of a joint process; it is salable,
but the sales value of by-products is not substantial enough
for management to justify undertaking the joint process; it
is viewed as having a higher sales value than scrap


A product that is an ancillary part of the primary production process, having
a minor resale value in comparison to the value of the primary product being
manufactured. Any proceeds from the sale of a by-product are typically offset
against the cost of the primary product, or recorded as miscellaneous revenue.


A material created incidental to a production process, which can be
sold for value.

Call protection

A feature of some callable bonds that establishes an initial period when the bonds may not be

Call provision

An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.

cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.

Cash Flow Provided by Operating Activities

With some exceptions, the cash effects of transactions
that enter into the determination of net income, such as cash receipts from sales of goods
and services and cash payments to suppliers and employees for acquisitions of inventory and

Cash Flow Provided or Used from Financing Activities

Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.

Cash Flow Provided or Used from Investing Activities

Cash receipts and payments involving
long-term assets, including making and collecting loans and acquiring and disposing of
investments and productive long-lived assets.

Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance Presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.

Consumer Credit Protection Act

A federal Act specifying the proportion of
total pay that may be garnished.

continuous improvement

an ongoing process of enhancing employee task performance, level of product quality, and level of company service through eliminating nonvalue-added activities to reduce lead time, making products
(performing services) with zero defects, reducing
product costs on an ongoing basis, and simplifying products
and processes

Controllable profit

The profit made by a division after deducting only those expenses that can be controlled by the
divisional manager and ignoring those expenses that are outside the divisional manager’s control.

Conventional project

A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer

cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a

cost of production report

a process costing document that
details all operating and cost information, shows the computation
of cost per equivalent unit, and indicates cost assignment
to goods produced during the period

Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

cost-volume-profit (CVP)

analysis a procedure that examines
changes in costs and volume levels and the resulting
effects on net income (profits)

Creditor Proof Protection

The creditor proof status of such things as life insurance, non-registered life insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals, professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the different provincial insurance acts take priority over the federal bankruptcy rules.
The provincial insurance acts protect life insurance products which have a family class beneficiary. Family class beneficiaries include the spouse, parent, child or grandchild of the life insured, except in Quebec, where creditor protection rules apply to spouse, ascendants and descendants of the insured. Investments sold by other financial institutions do not offer the same security should the holder go bankrupt. There are also circumstances under which the creditor proof protections do not hold for life insurance products. Federal bankruptcy law disallows the protection for any transfers made within one year of bankruptcy. In addition, should it be found that a person shifted money to an insurance company fund in bad faith for the specific purpose of avoiding creditors, these funds will not be creditor proof.

Cross-sectional approach

A statistical methodology applied to a set of firms at a particular point in time.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Detailed Program

Design In software development, a detailed step-by-step plan for completing the software.

Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price

Direct-Method Format

A format for the operating section of the cash-flow statement that reports actual cash receipts and cash disbursements from operating activities.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

economic production run (EPR)

an estimate of the number
of units to produce at one time that minimizes the total
costs of setting up production runs and carrying inventory

Entitlement Program

A program, such as social security, under which everyone meeting the eligibility requirements is entitled to receive benefits from the program, so that costs are not known in advance.

equivalent units of production (EUP)

an approximation of the number of whole units of output that could have been
produced during a period from the actual effort expended
during that period; used in process costing systems to assign
costs to production

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.


The official seizure by a government of private property. Any government has the right to
seize such property, according to international law, if prompt and adequate compensation is given.

Factor of Production

A resource used to produce a good or service. The main macroeconomic factors of production are capital and labor.

Fair price provision

See:appraisal rights.

Farm Improvement and Marketing Cooperatives Loans Act

See here

FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs

Formalized Line of Credit

A contractual commitment to make loans to a particular borrower up to a specified maximum during a specified period, usually one year.

Future-Oriented Financial Information

Information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.

Good delivery and settlement procedures

Refers to PSA Uniform Practices such as cutoff times on delivery
of securities and notification, allocation, and proper endorsement.

grade (of product or service)

the addition or removal of product
or service characteristics to satisfy additional needs, especially price

Gross Domestic Product

Total output of final goods and services produced within a country during a year.

Gross domestic product (GDP)

The market value of goods and services produced over time including the
income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S.
residents and corporations overseas.

gross margin, or gross profit

This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.

Gross National Product

Total output of final goods and services produced by a country's citizens during a year.

Gross national product (GNP)

Measures and economy's total income. It is equal to GDP plus the income
abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.


The profit a company makes before expenses and taxes are taken away.

Gross profit

The difference between the price at which goods or services are sold and the cost of sales.
Income The revenue generated from the sale of goods or services.

Gross profit

The result of subtracting cost of goods sold from sales. Synonymous with gross margin.

Gross Profit

Revenue less cost of goods sold.

Gross profit margin

Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.

Gross Profit Margin

Gross profit divided by revenue.

Guarantor program

Under the Freddie Mac program, the aggregation by a single issuer (usually an S&L)
for the purpose of forming a qualifying pool to be issued as PCs under the Freddie Mac guarantee.

In-house processing float

Refers to the time it takes the receiver of a check to process the payment and
deposit it in a bank for collection.

Income Tax Provision

The expense deduction from pretax book income reported on the
income statement. It consists of both current income tax expense and deferred income tax
expense. The terms income tax expense and income tax provision are used interchangeably.

Independent project

A project whose acceptance or rejection is independent of the acceptance or rejection of
other projects.

independent project

an investment project that has no specific
bearing on any other investment project

Independent Projects

A situation where an increase (or decrease) in the benefits of one
project has no effect on the benefits of another project. Also, a
situation where the acceptance of one project does not preclude
the acceptance of another project.

Indirect-Method Format

A format for the operating section of the cash-flow statement that
presents the derivation of cash flow provided by operating activities. The format starts with net
income and adjusts for all nonoperating items and all noncash expenses and changes in working capital accounts.


bits of knowledge or fact that have been carefully
chosen from a body of data and arranged in a meaningful way

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information-content effect

The rise in the stock price following the dividend signal.

information content of dividends

Dividend increases send good news about cash flow and earnings. Dividend cuts send bad news.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

Integer programming

Variant of linear programming whereby the solution values must be integers.

integer programming

a mathematical programming technique in which all solutions for variables must be restricted to whole numbers

Investment product line (IPML)

The line of required returns for investment projects as a function of beta
(nondiversifiable risk).

Ito process

Statistical assumptions about the behavior of security prices. For
details, see the book by Hull listed in the “Bibliography”.

joint process

a manufacturing process that simultaneously
produces more than one product line
joint product one of the primary outputs of a joint process;
each joint product individually has substantial revenuegenerating

Joint product

A product that has the highest sales value from among a group of products
that are the result of a joint production process.

Land improvements

The cost of improvements to land owned by the company, such as fencing and outdoor lighting.

Lean production

The technique of stripping all non-value-added activities from
the production process, thereby using the minimum possible amount of resources
to accomplish manufacturing goals.

Leasehold improvement

This is any upgrade to leased property by a lessee that will be
usable for more than one year, and which exceeds the lessee’s capitalization limit.
It is recorded as a fixed asset and depreciated over a period no longer than the life
of the underlying lease.







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