Which of the following is a 'Pro Forma' financial statement engagement?

Answer options:

Predicting the company's future cash flows based on management's assumptions.

Showing the effect of a hypothetical transaction (like a merger) on historical financial statements.

Presenting financial statements on a tax basis.

Summarizing the financial statements for an annual report.

How to approach this question

Pro Forma = History + 'What If'. Prospective = Future.

Full Answer

B.Showing the effect of a hypothetical transaction (like a merger) on historical financial statements.✓ Correct

Pro forma financial information shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

Common mistakes

Confusing Pro Forma with Prospective (Forecasts/Projections).

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