Question

Explain the purpose of a pro forma statement. What are the three questions it answers?

What critical information is needed to develop an accurate pro forma statement.

Answer 1

Purpose of pro forma statements

The purpose of pro forma financial statements is to provide the comparisons of past data and future performance projections. In such a case, uses of financial statements require to evaluate new business or proposed business entity on different basis comparable to the predecessor business in order to know the impact of the change on cash flows, income and the financial positions.

Three questions it answers are as follows:

• How can the capital need of the company be determined?
• How can the investors get more transparency about the consideration of all the variables needed for capital growth?
• How can we troubleshoot data records and find gaps in current performance?

Critical information for effective pro forma statement.

• The industry economic characteristics must be identified.
• The company strategies must be determined.
• The quality of firm's financial statement should be assessed.
• The current profitability and risk should be carefully analysed.
• The projections should be based on the materialistic approach.
• There should be proper tolerance for the gaps identified and budgeted.