CHAPTER 5

Long-Term Financial Forecasting

Chapter 4 provided an introductory overview of financial statement analysis. The focus of Chapter 4 was historical—meaning that financial statements were used to analyze how profitable, solvent, and liquid a company had been in the past. The focus of this chapter is forward looking—meaning that it examines how accounting information is used to forecast a company’s potential financial performance in the future.

Financial forecasting can cover both short-term time horizons (such as months or quarters) and long-term time horizons that span multiple years. Short-term forecasting (often called operational budgeting) is primarily a managerial activity performed by internal users of financial information. Short-term ...

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