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Pro Forma Income Statement

Pro forma Income Statement Assignment / Homework Help
Pro-forma income statement is also an income statement which however is prepared as a projection of the future as opposed to the actual transactions of the past. In other words, an income statement projects the financial performance of the period that has already expired (past) where as pro forma income statement is prepared to project the expected financial performance of the future.

Generally, pro-forma income statement is prepared with the current and past data in mind and adjusted to reflect any possible future event as a guide to project the future performance of an enterprise. It must be noted that these statements are prepared based on assumptions about the future and are to that extent vulnerable to changes and inaccuracies.

There are several benefits obtained out of pro-forma income statements. They are an important tool for planning future operations of the enterprise. They act as a benchmark for business operations and direct the resources and efforts of an enterprise towards the objectives set by the statement. Corrective and preventive actions can be taken based on the pro-forma income statements that predict a difficult situation in the future and help the business gear-up to the challenges that are anticipated ahead.

The major drawback is the fact that they are mere projections of the future which is uncertain. The basis of preparation of pro-forma statements viz. the past data and assumptions play a very important role. An incorrect or wrong assumption may lead the enterprise to focus attention and resources in areas that may eventually prove harmful to the enterprise. Past data may also not always be an indication of future performance especially in cases where there are significant changes in the environment in which the business operates.

Nevertheless, pro-forma income statement is an important document for businesses to plan and organize their efforts in the direction of intention reflected in there.

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