When adjusting financial statements, the forecast should be in the same detail as the pro forma income statements and should cover at least 12 months from the date of the most recent balance sheet included in the filing or the estimated consummation date of the transaction (Carmichael, Whittington & Graham, 2007). Firstly, it must be ensured that adjustments to the financial statement assume the projections were consummated at the beginning of the earliest fiscal year. This implies that the adjustments should include factually supportable adjustments that are directly attributable to the projections and are expected to have a continuing effect.
Secondly, the process should ensure that adjustments on financial statements reflect estimated salaries and income taxes. Carmichael, Whittington & Graham (2007) noted that “for dispositions, the adjustments should include deletion of the divested business and adjustments of expenses incurred on behalf of an organization” (p. 64). Thirdly, it must be ensured that tax effects of pro forma adjustments be shown separately and ordinarily be calculated at the statutory rate in effect during the periods presented. Carmichael, Whittington & Graham (2007) indicated that the statements should be in columnar form, presenting historical statements, pro forma adjustments, and the pro forma totals.
Two applications that can be used to forecast financial statements
The first application that can be used is Microsoft Excel. This spreadsheet program is a useful computational tool for preparing financial statements for forecasting. Weil & Maher (2005) says that the proper design and the preparation of a spreadsheet for pro forma financial statements provide an excellent learning process to enhance and solidify understanding of the relationships between various financial statement items. Weil & Maher (2005) further noted that using spreadsheet to adjust financial statement saves considerable time when making forecast in the future.
The second application that can be used to give forecasted financial statements is Lotus 1-2-3. Groppelli & Nikbakht (2006) noted that Lotus 1-2-3can be used to breakdown the major categories in the financial statements in order to trace areas deserving special attention. Lotus 1-2-3 application permits a person to set up what if assumptions that indicates how the adjustments in the financial statement might change a firms forecasts, given various economic scenarios, asset changes and sales projections (Groppelli & Nikbakht, 2006).