Question

Page 105: Would the pro forma financial statements be meaningful information for investors? Describe.

Answer 1

Pro-forma financial statements are issued by the company based on assumptions and estimates of the past performance or the events that might occur in future and affect the financial performance of the company. The pro-forma financial statement does help the investor and provide meaningful information to the investor as to what are the company expectation about its revenue or net income in the absence of actual data. Pro forma financial statements are also important from the perspective because it is based on the assumption of growth and other factors by the company management so it can also be used to value the company operations for several years into the future because the investors are very much concerned as to if they invest today then how the investment is going to perform in the future. Pro forma financial statements provide all the information as would an actual financial statement would provide but it is an estimate regarding future so a lot of its reliability depend on the management integrity and its ability to forecast. Another way the pro forma financial statements are useful to the investor is that if they do not agree with certain assumptions like the growth rate in sales or cost of goods sold or any other item on the financial statement, then they can change the assumption and see as to how that change is affecting the overall performance of the company and how far is the assumption from the company management assumption, so pro forma financial statement does help the investor in many ways in the absence of the actual financial data.