A. What do pro forma financial statements show? B. What are pro forma financial statements based...

A. What do pro forma financial statements show?

B. What are pro forma financial statements based on?

C. What are the strategic benefits of making financial projections on pro forma statements?

Solutions

Expert Solution

A. A pro forma financial statement is prepared by companies, it shows the projections and assumptions of the company with regards to future business activities of the company, basically it is an estimation of future.

B. The proforma financial statement is based on future assumption and projections regarding the business. A company may want to know the effect of available financing option on the company. The pro forma financial statement can include cash flow statement, balance sheet and profit and loss account.

C. The strategic benefit of such projected financial benefit is that company will be able to ascertain the future business activities and the resultant profitability. These kinds of statements are used in M&A activities, where a company will create a pro forma financial statement before acquiring other company, so that it can ascertain the impact of acquisition it will have on its own finances. It can also be used for the purpose of calculation of financial ratios.

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