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Pro Forma
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Pro forma financial statements are financial statements that include projections into the future. Interpretation of pro forma financials requires considerable caution. First, the pro forma results are inevitably based upon numerous critical assumptions, many of which may be hidden even if detailed explanatory notes accompany the pro forma financials. Second, GAAP does not encompass such forward-looking estimates. Since pro forma financial statements do not adhere to GAAP anyway, the financial statements may reflect accounting choices that would not be acceptable in practice. Consequently, pro forma financials may (knowingly or unknowingly) misrepresent actual results even if all the underlying assumptions were to prove correct. Nevertheless, no business plan would be complete without detailed pro forma financial statements. Pro forma financial statements are also developed to evaluate potential mergers, acquisitions, and spin-offs. Pro forma is Latin for “as a matter of form.”
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