Question

Pro forma cash flow is:

1) cash flow based on the actual.
2) calculated from subtracting assets from liabilities.
3) cash flow calculated on past receipts and expenses.
4) projected cash inflow and outflow.

Answer 1

Pro forma cash flow projects future cash inflow and outflow, essential for budgeting, unlike accounting profit which calculates past transactions. It includes expected revenues, expenses, and investment returns, helping businesses plan financially.

Step-by-step explanation:

Pro forma cash flow is a financial projection that estimates a company's future cash inflow and outflow. It is not based on actual past figures like accounting profit, which is the total revenue minus explicit costs. Instead, it considers future revenues, expenses, and capital outlays, including interest and dividends from financial capital, to predict how cash flow will look over a specific period.

While a business uses accounting profit to determine income taxes, economic success is measured by economic profit, which includes both explicit and implicit costs. Pro forma cash flow is essential for budgeting and financial planning, as it helps businesses anticipate any potential cash shortages or surpluses.