TAILIEUCHUNG - Financial Forecasting, Risk, and Valuation: Accounting for the Future

To further motivate this framework, consider a hypothetical manufacturer that uses chemical A and several other inputs to produce a product for sale. Chemical A can be purchased for $50 per gallon. Unfortunately, the use of Chemical A creates a toxic, regulated by-product that must be disposed of at some cost. The chemical's contribution to the plant's overall disposal costs is not known with precision and, from an accounting standpoint, simply appears as a general facility overhead cost. In other words, the disposal cost is not assigned to the process or product in which is used. How would we use the. | Financial Forecasting Risk and Valuation Accounting for the Future Stephen H. Penman Columbia University New York shp38@ Abstract Valuation involves forecasting payoffs and discounting expected payoffs for risk. Forecasting is often seen as the province of the statistician risk determination the province of asset pricing. This paper elaborates on the idea that financial forecasting risk determination and valuation are a matter of accounting. Accounting not only provides information to forecast payoffs but also specifies the payoffs to be forecasted. Further accounting determines the transition from the present to the future and thus implicitly the evolutionary parameters that a statistician might estimate for forecasting. Accounting also bears on risk determination in the way it handles uncertainty. Accordingly accounting is involved in both the numerator and the denominator of a valuation model. Indeed a valuation model is a model of accounting for the future and the effectiveness of a valuation model rides on the accounting principles employed. This paper elaborates on one idea financial forecasting risk determination and valuation are a matter of accounting. Forecasting is often seen as the province of the statitician. The paper makes the point that forecasting and accounting are so much linked that one can say that forecasting is really a matter of accounting for the future. Risk analysis for valuation has been the province of asset pricing in finance. The paper argues that accounting also bears on risk determination introducing the idea that asset pricing also involves accounting for the future. Accordingly accounting is very much the focus in valuation. Indeed the paper opens up the possibility that all aspects of valuation can be carried out within an accounting framework. Forecasting and risk determination are very much at the heart of practical valuation. Asset value is determined by future uncertain payoffs so valuation requires forecasting .

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