Question

Refer to the following issues regarding the conceptual framework and answer the questions below.

Accounting standards do not require companies to disclose forecasts of any financial variables to external users. For example, the relevant information is not provided to investors and creditors to help them predict future cash flows.

Required:
With proper reference and citation, complete the following:

b) Explain why information on the prediction of future cash flows i s not routinely provided to investors and creditors.

Answer 1

Financial Statements of a company are :

Balance Sheet

Income Statement

Cash Flow Statements

Statement of Changes in Equity

Accounting principles and many regulators such as Securities and Exchange Commission restricts the disclosure of forecast for the protection and safety of external users of such statements.

Forecast i.e. information on the prediction of future has their role in financial statements and not financial reporting. While preparing of cash flows many forecast could be done, but to report them to the external users are restricted as the statements are to give a true and fair presentation to the users. If at all these forecasts are to be disclosed to the external users then they should be backed up by legal disclaimers.

therefore, information on the prediction of future cash flows, one of the major financial statements of a company, is not routinely provided to investors and creditors to provide them with a reasonably reliable and comparable information regarding the inflow and outflow of cash. Many a times the management has a habit of preparing cash flow statements in such a way that it shows a healthy cash balance with the company. To avoid all these malpractices we can say such restrictions are required and should be adhered to seriously.