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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 following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

b) Rockford Company is planning to report one-fourth of its pension expense each quarter.

Operating profits and losses for the seven industry segments of Foley Corporation are:

Penley $ 90 Cheng 20

Konami 40 Takuhi (34)

KSC (25) Molina 150

Red Moon 50

Based only on the operating profit (loss) test, which industry segments are reportable?

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment
Total Revenue
Operating Profit (Loss)
Identifiable Assets
W
\( 60,000
15,000
\)167,000
X
10,000
3,000
83,000
Y
23,000
(2,000)
21,000
Z
9,000
1,000
19,000

\(102,000
\)17,000
$290,000

Instructions

Determine which of the operating segments are reportable based on the:

c) Identifiable assets test.

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

e) Fredonia Company has estimated its annual audit fee. It plans to pro rate this expense equally over all four quarters.

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 \(5,711,000 annually for the next 3 years. Related rental income from certain subleases to others is estimated to average \)3,094,000 annually for the next 3 years.” What information is provided by this note?

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