Accounting Information and Predicting Financial Performance

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Accounting Information and Predicting Financial Performance:

Accounting information can be useful in order to help predict future performance in the short and long term. It is important to note however that accounting information including accounting ratios show a company’s performance at a period in time. It is historical data. Trends can be identified by comparing data in sequential periods and future forecasts can be determined using historical data. There is no evidence or proof however, that these patterns will predict the future at a level of complete certainty. In my opinion, it would be hard to argue that decreasing profits over an extended period of time, or deteriorating liquid assets and increasing long term debt will have a negative impact if a trend continues. Eventually a company will have financial difficulties. Another type of predictive model that utilizes accounting information includes regression analysis. Regression analysis is viewed by many to be more useful that financial data or ratios alone. Regression analysis often test whether past stock prices, sales, profit, financial ratios, solvency, and other items are related to other variables including GDP, interest rates, market saturation of the industry, etc. In addition, a degree of confidence can be determined concerning the relationship of the variables in regression analysis Accounting ratios are determined from financial data, which as mentioned is historical. I do not feel that all financial ratios have the same impact however, when used as a predictor of future performance. Cash is a non-depreciable asset, and as such is excellent for comparisons over long periods of time (Turk, 2006).
Cash flow ratios seem to be the best types of ratios to predict future performance since they are more objective in nature vs. the subjective nature of other ratios such as P/E ratios. Cash flow ratios…...

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