Principles of Managerial Finance, 15th Edition

4.7 Evaluation of Pro Forma Statements

1. LG6

It is difficult to forecast the many variables involved in preparing pro forma statements. As a result, investors, lenders, and managers frequently use the techniques presented in this chapter to make rough estimates of pro forma financial statements. It is nonetheless important to recognize the weaknesses of these simplified approaches. The weaknesses lie in two assumptions: (1) that the firm’s past financial condition is an accurate indicator of its future and (2) that managers can force certain accounts to take on “desired” values. Despite their weaknesses, pro forma financial statements remain useful to managers.

However pro forma statements are prepared, analysts must understand how to use them ...