pro forma financial statements are
a. the most comprehensive means of financial forecasting
b. often required by prospective creditors
Thank you for using the Jiskha Homework Help Forum. Here is a definition of Pro Forma Financial Statements: Definition
Financial statements as adjusted to reflect a projected or planned transaction.
A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results in order to emphasize either current or projected figures.
Pro forma financial statements could be designed to reflect a proposed change, such as a merger or acquisition, or to emphasize certain figures when a company issues an earnings announcement to the public.
Investors should heed caution when reading a company's pro-forma financial statements, as the figures may not comply with generally accepted accounting principles (GAAP). In some cases, the pro-forma figures may differ greatly from the those derived from GAAP.
To answer your question, pro forma financial statements can be both the most comprehensive means of financial forecasting (Option a) and often required by prospective creditors (Option b). Let me explain how you can arrive at these answers.
Option a: Pro forma financial statements can be the most comprehensive means of financial forecasting because they provide a projected or planned view of a company's financial performance. These statements are adjusted to reflect anticipated transactions or changes, such as mergers, acquisitions, or other significant events. By using pro forma financial statements, companies can estimate how these events will impact their financial position in the future, allowing them to make more informed decisions.
Option b: Prospective creditors often require pro forma financial statements because they provide a more accurate representation of a company's financial health compared to historical financial statements. These statements allow creditors to assess a company's ability to meet its financial obligations in the future, taking into account any anticipated changes in the company's operations, such as expansion plans or debt restructuring. By analyzing pro forma financial statements, creditors can make better-informed decisions regarding lending money or extending credit to the company.
In summary, pro forma financial statements can serve as a comprehensive means of financial forecasting (Option a) and are often required by prospective creditors (Option b) to assess a company's financial health and make informed decisions.