Accounting Information and Predicting Financial Performance

1049 Words Feb 5th, 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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The coverage ratios use cash flow from operations in most cases. Coverage ratios are important to long term investors and creditors because of the nature of the ratios that show the availability of cash to pay for items that include long term debts and dividends as well calculating percentages of cash flow from operations to shareholders equity, and average number of common shares outstanding (Ibarra, 2009). In addition, it has been determined that the cash flow to total debt (a coverage ratio) can be used as one of the best indicators of financial distress (Jooste, 2007). In all coverage ratios, a high ratio and increasing trends is the best case scenario.

Regression analysis seems to be extremely useful in determining financial distress and the bankruptcy of firms. In fact, in a particular study conducted by Bredart in 2014, it was presented that regression analysis was able to show an 84% prediction accuracy rate in determining bankruptcy of 870 firms between the years of 2000 and 2012 (Bredart, 2014). The independent variables used in Bredart study included profitability (net income/total assets), liquidity (current assets/current liabilities), and solvency (equity/total assets) while the dependent variable included financial distress.
Although cumulative research seems