The usefulness of accounting data to investors and creditors for predictive purposes is necessarily forward looking. However, under generally accepted accounting principles, financial statements are constructed primarily as an historical record.
a. What limitation does this impose on the usefulness of financial statements for predictive purposes, and how is this limitation evident from the research reviewed in the chapter?
b. Provide examples of important forward-looking events that either are not reported in financial statements or are not reported in a timely manner.
c. Why may the feedback value of audited financial statements make them very important to investors and creditors even though predictive value is not necessarily high?