Accounting Information and Predicting Financial Performance Essay

1042 Words Jan 29th, 2016 5 Pages
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
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Solid research exists that demonstrate that predicting financial performance is sound. Jonathon Lewellen’s preformed research based upon regression analysis using accounting ratios. His findings suggested that regression analysis using accounting ratios including dividend per share/price per share (DY), book value/market value (B/M), market value per share/earnings per share (P/E), can be used to predict future returns, with DY having the most predictive properties (Lewellen, 2002). In my opinion, methods outlined in this paper can be used as predictive resources if used properly. They should not be used in isolation however. A perfect example of this cautionary statement existed in the oil industry. At one point, just over a year ago, the oil industry seemed to end an extended period of growth. Accounting financials as well as accounting ratios and regression analysis were very robust. If historical financials, ratios, and regression analysis were the only methods used by key stakeholders at the time, then the decline of crude prices would have been completely unforeseen. However, if the stakeholders would have looked further than the financials and historically based data, they would have known that world inventories of oil were approaching all-time highs. At some point supply would overtake demand and oil prices would have to decline. Of course some looked to OPEC to cut

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