What is the difference between financial statements and projected financial statements?

Understanding the Distinction Between Financial Statements and Projected Financial Statements

Financial statements and projected financial statements serve distinct purposes in providing financial information. While financial statements reflect the historical performance of a business, projected financial statements provide an outlook on its potential future outcomes.

Financial Statements: Reflecting Past Performance

Financial statements are prepared using actual financial data from a company’s past operations. They include:

• Balance Sheet: A snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and equity.
• Income Statement: A summary of a company’s revenues, expenses, and net income over a specific period.
• Cash Flow Statement: A record of a company’s cash inflows and outflows.

These statements provide valuable insights into a company’s financial health, profitability, and liquidity.

Projected Financial Statements: Forecasting Future Outcomes

Projected financial statements, on the other hand, are forward-looking documents that forecast a company’s financial performance in the future. They are typically created based on a combination of historical data and assumptions about future events and conditions.

Projected financial statements include:

• Projected Balance Sheet: Estimates of a company’s future assets, liabilities, and equity based on anticipated changes.
• Projected Income Statement: Estimates of a company’s future revenues, expenses, and net income based on projected sales, production costs, and other factors.
• Projected Cash Flow Statement: Estimates of a company’s future cash inflows and outflows based on anticipated changes in operations and investments.

Projected financial statements help businesses make informed decisions about their future growth, financing needs, and resource allocation.

Key Differences

The primary differences between financial statements and projected financial statements lie in their:

• Timeframe: Financial statements report actual past performance, while projected financial statements provide estimates of future outcomes.
• Certainty: Financial statements are based on actual data, while projected financial statements rely on assumptions and estimates.
• Purpose: Financial statements provide a historical record for analysis and reporting, while projected financial statements are used for planning and decision-making.

Example

Consider a store with actual earnings of $5,000 from the previous year. This is an actual figure that represents the company’s realized financial performance. In contrast, projected earnings would be an estimate of the store’s expected earnings for the upcoming year, based on factors such as sales projections and planned cost reductions.