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Financial Reporting, Financial Statement Analysis and Valuation 9th Edition

Financial Reporting, Financial Statement Analysis and Valuation (9th Edition)

Book Edition9th Edition
Author(s)Wahlen
ISBN9781337614689
PublisherCengage
SubjectFinance
Chapter 10, End of Chapter, Questions and Exercises, Exercise 10.1
Page 701

Relying on Accounting to Avoid Forecast Errors. 

 

The chapter states that forecasts of financial statements should rely on the additivity within financial statements and the articulation across financial statements to avoid internal inconsistencies in forecasts. Explain how the concepts of additivity and articulation apply to financial statement forecasts. Also explain how these concepts can help you avoid potential forecast errors.

Verified Answer

The concepts of additivity and articulation can apply to financial statements and forecasts when:

 

  • The income statement represents the real profit or loss, taking into consideration all the possible income, expenses, capital gains and deficits. 
  • The cash flow statement depicts all the balance sheet changes as well as any cash inflow or outflow according to the income statement. 
  • The balance sheet represents the accurate financial position by considering all the assets, liabilities and equity. 

 

These concepts helps the avoiding the potential forecast errors by:

 

  • including all the major accounts that needs to be considered,
  • taking into consideration all the changes in the figures of financial statements and
  • determining all the possible cash inflows and outflows
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