Pro forma financial statements are basically financial projections for a specific period of time presented in a standardized way. One of the ways in which pro forma statements is used in accounting is for business planning. The format of these statements enables the management to evaluate different business plans and therefore select one which benefits the company most (uofs, 2009). Pro forma statements can also be used in financial modeling by providing crucial data used in calculating ratios as well as other computation
Projected financial statements also enable the company to assess the impacts of financial changes in the company e. g. analyzing the effects on financial position of a potential merger or acquisition Pro forma financial statements are used by companies in their external reporting requirements e. g. reports to stakeholders. Regulatory bodies like SEC also require listed companies to prepare projected financial statements b) Steps in financial forecasting In performing financial forecasting, the first step is the determination of the projected sales.
Sales affect most of the other elements in a financial statement of a company. The next step is to project those items that vary with sales. These items include expenses and assets. After determining projections for items that
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