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Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What are the arguments for preparing profit forecasts?

Short Answer

Expert verified

Profit forecasting helps in planning the company's growth strategy.

Step by step solution

01

Meaning of Profit Forecast

Profit forecasting refers to the estimate of future earnings after taking into account all of the elements that influence the magnitude of a company's profits, such as pricing policies, costing policies, and depreciation policies, among others.

02

Explaining the arguments for-profit forecasting

Arguments for mandating projections to be disclosed include:

  1. Investment decisions are founded on future expectations; hence, knowing what to expect in the future can help you make better judgments.
  2. Forecasts are already being passed about informally, but they are unregulated, usually inaccurate, and may not be available to all investors equally. This jumbled issue has to be straightened up.
  3. As circumstances change so quickly these days, prior data is no longer a reliable predictor.

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Most popular questions from this chapter

The controller for Lafayette Inc. recently commented, “If I have to disclose our segments individually, the only people who will gain are our competitors and the only people that will lose are our present stockholders.” Evaluate this comment.

Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?

Answer each of the questions in the following unrelated situations.

d) A company has current assets of 600,000andcurrentliabilitiesof240,000. The board of directors declares a cash dividend of $180,000. What is the current ratio after the declaration but before payment? What is the current ratio after the payment of the dividend?

An annual report of Crestwood Industries states, “The company and its subsidiaries have long-term leases expiring on various dates after December 31, 2017. Amounts payable under such commitments, without reduction for related rental income, are expected to average approximately 5,711,000annuallyforthenext3years.Relatedrentalincomefromcertainsubleasestoothersisestimatedtoaverage3,094,000 annually for the next 3 years.” What information is provided by this note?

(Effect of Transactions on Financial Statements and Ratios) The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock (100par)outstanding,acurrentratioof2.7:1,andasubstantialnetincomefortheyeartodate(beforegivingeffecttothetransactionconcerned).Onthatdate,thebookvaluepershareofstockwas151.53.

Each numbered transaction on the next page is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2018 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement.

For each of the numbered transactions you are to decide whether it:

  1. Increased the corporation’s 2018 net income.
  2. Decreased the corporation’s 2018 net income.
  3. Increased the corporation’s total retained earnings directly (i.e., not via net income).
  4. Decreased the corporation’s total retained earnings directly.
  5. Increased the corporation’s current ratio.
  6. Decreased the corporation’s current ratio.
  7. Increased each stockholder’s proportionate share of total stockholders’ equity.
  8. Decreased each stockholder’s proportionate share of total stockholders’ equity.
  9. Increased each stockholder’s equity per share of stock (book value).
  10. Decreased each stockholder’s equity per share of stock (book value).
  11. Had none of the foregoing effects.

Instructions

List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s).

Transactions

  1. In January, the board directed the write-off of certain patent rights that had suddenly and unexpectedly become worthless.
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