ExpertMedium1 markMultiple Choice
CPA · Question 77 · Area 4: Reporting
Which of the following is a 'Pro Forma' financial statement engagement?
Which of the following is a 'Pro Forma' financial statement engagement?
Answer options:
A.
Predicting the company's future cash flows based on management's assumptions.
B.
Showing the effect of a hypothetical transaction (like a merger) on historical financial statements.
C.
Presenting financial statements on a tax basis.
D.
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
Showing the effect of a hypothetical transaction (like a merger) on historical financial statements.
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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