Question

Hi Max. You made an interesting observation related to future expectations. Most analytical procedures such as trend analysis and ratio analysis are based on historical figures from prior accounting periods. This somewhat assumes that the history is a reasonable reflection of what we might expect in the future. However, that is not always the case. Class, can you think of a scenario where our expectations for the future might be vastly different from past performance?

Answer 1

There can be many scenario where the past performance is not the reflector of the future performance. Once such scenario is change is laws and regulations.

A change in the laws and regulation is inseperable with the business. A slight change in the law can affect the business very badly. Laws and business goes hand in hand. It is possible that a business running with great profits has to shut down due to change in law. For example:- Suppose there is a company only making cigarettes and its business going very fine. But this year due to its bad effect on health, government has changed the law to shut all the cigarette making companies. So, here with the change in law, even though the company was running smooth had to shut down.

So, change in law and regulation is one reason why our expectations for the future might be vastly different from past performance.