Question

Discuss an assumption made when compiling a cash budget or pro forma financial statements. Be sure to include how that assumption may be calculated incorrectly and the effect it may have on the firm.

Answer 1

Answer:

It is not possible to compile these statements, because the company will work under unrealistic indicators that very rarely can be achieved.

Explanation:

The first thing to consider is the nature of each report, since, for example, the cash budget is simply a projection expected in a certain period on a certain item; in the other case, the additional pro forma statements such as the income statement or balance sheet, project the behavior for a certain time. The main difference is that the nature of each state is different, in that it analyzes variables of totally different components. Thus, each pro-forma statement must consider the group of accounts necessary to be able to project, which means that the cash budget must only consider that item and it cannot be combined with other financial statements.

This assumption will determine in good way the objectives that the organization draws up for a certain time, since making a compilation of all the mentioned states runs the risk of making a bad calculation or duplicating the projections, which will cause the company to work under unreal figures and therefore possibly see that fulfillment of goals agreed at the beginning of each period truncated.