Pro Forma Financial Statements

Posted: August 26th, 2021

Pro Forma Financial Statements

Name

Institutional Affiliation

Pro Forma Financial Statements

Notes to the Financial Statement

Notes or footnotes are the additional information on the financial statements that assist users in understanding how an organization calculates the economic reports from one fiscal period to another. The notes explain any disclosures or inconsistencies in the financial year account methodologies from the previous period in the balance sheet, cash flow statements, and income statement (Robinson, 2020). Therefore, the footnotes supplement and provide clarity to the users of financial reports by revealing any underlying issue about the financial health of a company. The next sections of the paper offer a detailed analysis of the fiscal notes provided on the management of depreciation, supplies, and inventory in Peyton Approved Second Location financial statements.

Depreciation Management

It is the company’s policy to provide for depreciation by matching revenues against the expense principle. The company uses the straight-line method in calculating depreciation. The techniqueinvolves subtraction of scrap value from the initial cost. The results are then divided with a number of years, thus obtaining a depreciation value.

Inventory Management

Peyton Approved Second Location inventories are stated as a lower of cost or market basis. This is critical to the company since it makesit a cost leader, thereby enabling the company to gain a competitive advantage over its competitors. Also, the inventoryis determined and valued according to the Generally Acceptable Accounting Principles (GAAP), as demonstrated in the adoption of first-in, first-out (FIFO) stock-flow method.

Supplies Management

The company supplies are stated at their carrying values after deducting reserves for doubtful accounts.  Equally, the company also identifies, source, negotiates, and procures for its essential products from supplies that offer adequate repayment period and offer quality products with the least cost. It is the company’s policy to pay for its supplies one month after supplying.

Management Analysis Brief

The company discussion gives an overall impression of Peyton Approved Second Location financial reports for the fiscal year 2018. The current year’s financial performance estimates have improved in various ways as compared to the prior years. From the pro forma financial position, assets and liabilities are managed at 80%. The same is demonstrated by the company revenues and expenses according to statements for the fiscal year ending 31^stDecember 2019. Therefore, the company can control the cash flow, costs, and revenues by using pro forma statements, which provides a significant direction to the company (Tyan, 2017). Also, pro forma statements assist the company in meeting the long-term financial goals by developing benchmarks for forecasting, performing contingency planning in challenging times, budgeting for new expenditure impacts, and identifying the causes of the economic problems. In this way, the company can reduce or manage its financial risks.As such, it is possible to create stability and certainty within the business environment, thereby enhancing future budgeting.

Inventory Costing and Valuation

Inventory costing and valuation can be prepared in various ways, such as last in first out (LIFO), weighted average, and first in first out (FIFO) (Mazumder & Purohit, 2018). Peyton Approved Second Location adopts the FIFO method when disclosing and costing its inventories. Subsequently, contingent liabilities affect financial statements due to their uncertainty and timing (Mazumder & Purohit, 2018). Hence, before revealing a contingent liability, it must have a more than 50% possibility of being realized and possible to estimate its value. At the same time, the contingent liabilities should be remote, probable, and reasonable according to GAAP principles. Equally, it should be disclosed as a liability in the balance sheet and expense in the income statement. Therefore, the revenue in the company is recognized when it is earned and not when cash is collected.

Conclusion

Ultimately, there are several issues in the interpretation of financial reports. These include the use of historical costs in preparation, inflationary effects, and intangible assets that are not recognized in the financial statements. Equally, non-financial issues in a company are not disclosed. In this case, the management can manipulate the reports. Thus, different companies may adopt different accounting standards thereby making it hard to implement cross-company comparative analysis

References

Mazumder, B., & Purohit, K. (2018). Revenue recognition for long-term contracts under IFRS 15: An analysis with reference to the real estate companies in Bangladesh. Indian Journal of Accounting, 50(2), 22-30.

Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.

Tyan, D. B. (2017). Application, technical issues, and interpretation of C1q for graft outcome. Current Opinion in Organ Transplantation, 22(5), 505.