Preparing and evaluation of pro forma statements
Some industries tend to increase according to their sales whereas others do not. It is not advisable to use the past cost or the expense ratios simply because they can understate the amount of sales if the profit is increasing. The best way or method to produce pro forma income statements is to divide the expenses in the company into fixed portions. It is also important to put the expenses into variable components. On the other hand, preparation of pro forma balance sheet called for a simplified method known as the judgmental approach. The company uses Judgmental approach to estimate the value of accounts from the balance sheets. After the estimation, the company therefore uses the external finances to balance source. Judgmental approach calls for assumptions to be done which include the minimal cash balance, securities which are marketable, a new machine cost, ending inventory and many others (Bhattacharya, et al. 2004).
Conclusively, Pro forma financial statement evaluation requires the managers or the lenders to understand the use of the balancing decisions. The pro forma statements allow the managers to make analysis the outflow and inflow of the company. Evaluation of the pro forma statements needs the managers to understand the cash flows and also evaluate the company’s performance. It is ethical in judgmental approach whereby there is sense of liquidation of the securities in the firm of the external finance. In addition, there were issues of intensifying financial regulations whereby it called for the SOX Act to address. Impacts of SOX Act to companies include the introduction of internal controls. Internal controls were used for detecting, preventing and deterring the fraud that existed within companies. The SOX Act ensured that there are set consequences which companies and individuals could face after exercising fraud. There was creation of more secure internal controls which ensured that the companies exercised firm risks and produced quality services to the clients (Bhattacharya, et al. 2004).
Bhattacharya, N., Black, E. L., Christensen, T. E., & Mergenthaler, R. D. (2004). Empirical evidence on recent trends in pro forma reporting. Accounting Horizons, 18(1), 27-43.