What is the pro forma earnings approach, and what problem does it present. Also, explain how pro forma earnings differs from the G4+1 income statement proposal.
What will be an ideal response?
ANSWER:
Pro forma earnings is a supplementary measure to GAAP income. The idea underlying pro forma earnings is that for predictive purposes, the exclusion of unique, one-time events can be useful to investors. The problem with this approach is that management has frequently viewed the pro forma idea as a way to eliminate bad news events and maintain favorable events, making the statement biased and misleading.
A G4+1 report takes an opposite tack to pro forma earnings. It proposes a single income statement with three components:
(1) the results of operating or trading activities;
(2) results pertaining to financing and other treasury activities;
(3) other gains and losses.
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