How are the seller's financial statements handled after an acquisition (combined financial statements)?

How to answer

In an M&A deal, you combine the financial statements of the buyer and seller by adding together the line items from each company's income statement, balance sheet, and cash flow statement. You then make several key adjustments: 1) Eliminate the seller's existing shareholders' equity, 2) Record goodwill and other purchase price allocation adjustments, 3) Write up or write down the seller's assets to fair market value, 4) Add new acquisition debt and subtract cash used, 5) Account for transaction and financing fees, and 6) Reflect any expected synergies. The combined entity's statements are presented on a pro forma basis.