Luke Burton Fin 685
9/28/15

My Conclusion to the utility of accounting information is that this information is limited for the prediction of financial performance beyond a time horizon of three to four years and should not be solely relied upon for this prediction. As the topic bond article suggested, and as the general consensus of the class suggests, I would agree that more information is required to make performance predictions with any confidence, as environmental events that are not taken into account with financial ratios may neutralize any confidence in predictions out past three or four years.

The Authors of the article “Financial Ratios: The Prediction of Corporate ‘Success’ and Failure” (Houghton et al.) have found that an accuracy percentage significantly greater than chance was demonstrated with using financial ratios of the last five years to predict failure of an organization in the next year, however did not find similar accuracies in predicting financial success (increased EPS) in the next year. This was found true in all three groups tested of varying financial backgrounds. The authors attribute this to limitations in environmental predictability and human information processing, as suggested in Brunswick’s Simple Lens model

Other issues that may affect the accuracy of predictions based on stand alone financial ratios are the industries in which the organization operates, as the nature of these industries may drive different preferred ratio values, Technological breakthroughs that may change market demand, and as Bryon Mcquinn cited from “Financial and Managerial Accounting For MBA’s” (Easton et al.) differences in financial disclosures from organizations.

I do believe, however, that financial ratios and the information that can be pulled from them can serve as a piece of the puzzle that can be used screen against