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What Is a Pro Forma Income Statement

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What is the purpose of a Pro Forma income statement?
How would you use the information from the Pro Forma income statement?
Provide an example.

According to businesstown.com, Pro Forma income statements are “an important tool for planning future business operations. If the projections predict a downturn in profitability, you can make operational changes such as increasing prices or decreasing costs before these projections become reality.” Pro Forma income statements are used to let investors know a company’s operating results, conforming to investopedia.com, “Pro Forma financial statements take out one-time charges to smooth earnings.” In addition, “Pro-forma earnings describe a financial statement that has hypothetical amounts, or estimates, built into the data to give a "picture" of a company's profits if certain nonrecurring items were excluded.” (investopedia.com)

The information from a Pro Forma income statement can be used through: * To give investors a clearer view of company operations - This applies to the nature of a business. investopedia.com explains that “Companies in certain industries tend to use pro-forma reporting more than others, as the impetus to report pro-forma numbers is usually a result of industry characteristics. For example, some cable and telephone companies almost never make a net operating profit because they are constantly writing down big depreciation costs.” (businesstown.com) But; * For companies that do not include cash charges, investors can see their actual cash profit. An example from investopedia.com “recall AOL Time Warner's massive goodwill write-off of about $54 billion in 2002 to reflect the value of AOL's merger with Time Warner in the previous year. With accounting charges nearing $100 billion, Time Warner's GAAP earnings for the year probably would not have been a very good predictor of future prospects…...

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