The Two Main Weaknesses of Pro Forma Financial Statements Are

question 47

Multiple Choice

The two main weaknesses of pro forma financial statements are ________.

• A)they produce inaccurate forecasts and they cannot be used by anyone outside the firm
• B)they assume that the firm's past financial condition is an accurate indicator of its future and that managers can force particular accounts to take on particular desired values
• C)stockholders take the pro forma forecasts too seriously,which causes volatility in stock prices when actual outcomes deviate from forecasts
• D)pro forma statements provide useful forecasts of profits,but not cash flows,and they rely too much on the assumption that income statement items will grow at the same rate as sales

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Definitions:

Securities Industry

A sector comprising firms and institutions that facilitate the issuance, buying, and selling of securities, like stocks and bonds, to finance businesses and investment opportunities.

Federal Government

The national government of a country, responsible for implementing and enforcing laws, and managing the country's affairs.

Equity Carve-out

A strategic corporate action where a company sells a percentage of the interest of a subsidiary to outside investors, thereby offering it publicly while retaining control.

Market Price

The current price at which an asset or service can be bought or sold.