Question

Financial performance is measured in many ways.

Requirements

1. Explain the difference between lag and lead indicators.

2. The following is a list of financial measures. Indicate whether each is a lag or a lead indicator:

a. Income statement shows net income of \(100,000

b. Listing of next week’s orders of \)50,000

c. Trend showing that average hits on the redesigned Web site are increasing at 5% per week

d. Price sheet from vendor reflecting that cost per pound of sugar for the next month is $2

e. Contract signed last month with large retail store that guarantees a minimum shelf space for Grandpa’s Overloaded Chocolate Cookies for the next year

Short answer

(1) The lag indicators indicate the past performance and activities but lead indicators indicate the future performance and activities

(2A) Lag Indicator

(2B) Lead Indicator

(2C) Lag Indicator

(2D) Lead Indicator

(2E) Lead Indicator

Step-by-step solution

Difference between lead indicators and lag indicator

The lead indicator refers to the indicators which show the activities or performance of the company in the future. These activities will either increase or decrease the profits of the business. Sometimes indicators can compromise future sales orders, delivery times, etc.

On the other lag indicator is a measure that provides information about the past performances of the business to the management. The financial measures are usually, past indicators as they show the number of activities performed in the past.

Classification of Indicators

The classification is as follows:

1. The income statement is a lag indicator as the income statement is a financial statement showing past records
2. Listing of next week’s order is a lead indicator, as it is indicating towards the activity of future
3. The trend is a lag indicator as it shows the information using the data of past periods.
4. Price sheet for next month will be considered as the lead indicator as it shows the prices for future periods
5. Contract showing the shelf life of future period will come under the lead indicators as it is showing future performance.