Why do firms use pro forma financial statements?© BrainMass Inc. brainmass.com December 15, 2020, 11:49 pm ad1c9bdddf
Pro forma financial statements may also be considered as hypothetical financial statements because they are computed according to estimated relevance of certain events and conditions experienced or may be experienced by a company. Among the pro forma financial statements include: pro forma income statement, pro forma balance sheet, or pro forma cash flow. They are often prepared to see (or show) the effects of company's strategies (e.g. financing options). This is done by coming up with projections, using certain assumptions.
Pro forma financial statements, though prepared using certain assumptions, are useful in providing essential information to outsiders such as potential lenders and investors. They could determine forecasted changes in financial results of certain company decisions ( e.g. additional investment, use of different financing options). Correspondingly, outside users may come up with appropriate decisions. Since best case and worse case scenarios may be seen, company management may think of strategies to mitigate risks.