Question

What does the analyst mean by this statement? How would a company hide information inside financial statements? What is a pro forma financial statement and how is this used in the financial markets?

Answer 1

1. Companies hide information inside financial statement in following ways:

1. Inflating Revenues: Companies may treat lump-sum receipts of advances received from customer for multiple years in future into revenues of one year than amortizing them yearly. They may also indulge into making hefty sales at year wherein the goods are returned back in the next financial year.
2. Postponing expenses: Companies may separate a share of current year expenses as prepaid thereby increase asset positions as well as profits.
3. Off-balance sheet items: Companies transfer their liabilities outside the balance sheet by using means of a subsidiary company or presenting finance leases as operating lease agreements.
4. Other Items: Companies transfer excess balance portions in their reserves to the income side and falsely report them as income when they aren't at all.
5. Pension and other benefit plans: Companies use unrealized gains on these plans to present them as income and inflate the financial performance.

2. Proforma financial statements are financial reports prepared based on a concrete financial planning such as merger, acquisition, amalgamation or investing into a new venture, divestment, etc. These are useful for investors to make decision of their investment in the company indulged into the above transactions as described in their proforma financial statement.