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The article discusses forecast evaluation in accounting. Accounting data are often used in the development of forecasts and accountants are often called on to make forecasts. Development of a variable overhead rate per direct labor hour may, for example, be viewed as development of a forecast--whether it is used in a standard cost system, in a budget, or in a product mix decision. Similarly, establishment of a depreciation policy requires a forecast of service life. Furthermore, the ability to forecast some specific outcome has been offered as a criterion for selection among accounting alternatives. But, whatever its ultimate purpose, development of a forecast constitutes a decision--a conscious choice among alternatives. The concern in this paper is limited to this decision aspect of forecasting. In particular, in the first section it is demonstrated that selection among forecast alternatives is a subset of the accountant's general problem of selection among information alternatives. Following this, characterization is done of prevailing methods of selecting among forecast alternatives as a simplification of the basic information choice problem. The paper then concludes with two illustrative simulations.

Any financial statement provides a partial basis for evaluating the results of current operations and current financial position. Financial statements relating to periods of less than one year have the same evaluation and forecasting objectives as annual statements. However they differ in a manner that they are also used by outside investors in forecasting the results that will be shown on the annual statements. But interim statements have never received the professional attention that has been devoted to annual statements. The purpose of this research paper is to explore the objectives of interim reporting and to make a tentative statement of concepts to be applied in the development of interim financial statements. Through this exploration it suggests that the usefulness of published interim income statements in predicting annual profit is likely to be impaired if these statements do not include adjustments for fluctuations in the timing of cost releases and concludes that the management has a responsibility for anticipating in income statements for the first three quarters the annual total of a wide variety of business expenses.

The article focuses on the extent to which predictions can be made about certified public accountants (CPA) examination results. Studies of the use of the Institute sponsored Orientation and Achievement Tests as a means of making such predictions have produced encouraging results. On the basis of these studies, which are of limited scope, it appears that reasonably accurate predictions can be made in many instances. There are many benefits which will accrue to the profession and to individuals if fairly accurate predictions can be made that a particular individual should be able to pass the CPA examination; that another individual is unlikely to pass, and that still another one has a slight chance to pass. Such predictions would aid appreciably in guidance work, and would be of value to employers. Predictive devices might be used by state examining boards in various ways. Boards might be aided in their efforts to encourage potentially able men to continue preparation and to discourage those who are obviously not ready to take the examination as well as those who may never qualify. Predictive devices might aid considerably in reducing failures.

One criterion being employed by a growing body of empirical research is predictive ability. According to this criterion, alternative accounting measurements are evaluated in terms of their ability to predict events of interest to decision-makers. The measure with the greatest predictive power with respect to a given event is considered to be the best method for that particular purpose. Because the predictive ability criterion is currently being used and is likely to experience even greater use in the future, this article examines its origin, its relation-ship to the facilitation of decision-making, and the potential difficulties associated with its implementation. Knowing the origin of the predictive ability criterion is important in understanding what is meant by predictive ability and why it is being used in evaluating accounting data. The criterion is well established in the social and natural sciences as a method for choosing among competing hypotheses. The use of the predictive ability criterion presupposes that alternatives under consideration have met the tests of logic and that each has a theory supporting it.

The accounting theory revolution consists essentially of an attempt to overthrow the traditional emphasis on costs in accounting theory and to replace it with a logical structure centered on values. It is hoped that this will provide a basis for resolving major theory controversies and for narrowing the present diversity of accepted practice. The "pure theory" of accounting rests on a definition of resources in terms of economic power of an entity and a definition of income in terms of changes in resources. The ideal measure of resources is current exchange value. This is not the same as either liquidation value or market replacement cost, though these set lower and upper limits, respectively, and can often be used to measure value. When these limits are widely separated, value must be estimated. It is often appropriate to forecast future benefits in making these estimates. The amount expended for an asset is ordinarily a reliable measure of its value at the time of acquisition. In some cases it is impossible to get a reasonable approximation of the value of an asset, though there may be no doubt that some exchange value exists. Such assets are included in the term "goodwill," and are not recorded in the absence of an actual exchange.

This article focuses on some of the problems facing the accounting society and suggests what the profession of accounting can do toward their future solutions. The problems are summarized as--To induce, rather than to force, business management and union labor to reach collective bargaining agreements, to save out of the flow of consumer purchasing power and corporate earnings, enough to equip with adequate tools and other capital assets, to achieve a more adequate understanding on the part of many more persons of the nature and workings of monetary system in its relationship to international and domestic commodity prices, wage rates, volume of business, volume of savings and levels of interest rates. To make progress towards something, that is a paradox and may turn out to be an impossibility. According to the author, accountants can and must play a leading role in disseminating the necessary information and knowledge and the extent to which Accountancy contributes to the necessary solution of these problems will determine the brilliance of its future.

This article presents information on a report of the Committee on Accounting Theory Construction and Verification of the American Accounting Association. The process of theory construction and verification has for many years been the subject of analysis from a variety of points of view by scholars interested in the philosophy of science. Only recently has it become a topic for research and discussion in accounting. A theory is, first of all, a set of sentences. Theories are expressed in a language and therefore the study of language is pertinent to the study of theories. Indeed much of the philosophy of science is nothing but a study of language, although it is a study of the language peculiar to the scientist. The inputs to the accounting system are observations made on real world phenomena. The outputs from the accounting system are both empirical and analytic. Only the empirical outputs can be directly verified by independent reference back down to the observation plane. The analytic outputs must somehow be verified through the prediction models and the decision models in which they, along with the empirical outputs, are used. The outputs from prediction models are primarily empirical, although it is possible that some may be analytic. Decision models utilize both empirical and theoretical outputs from both the accounting system and the prediction models.

This article suggests a procedure for evaluating the accuracy of forecasted information in accounting and presents the results of a limited empirical investigation of forecasting accuracy. Two aspects are important in the evaluation of forecasting accuracy: (1) differences between the forecasted amount and the actual amount for a particular year and (2) trends in differences over time. An analysis of differences arising in a particular year provides an indication of a firm's ability to meet its goals and would reveal substantial differences that would merit investigation into a management's ability to react to unanticipated events. At the outset of this project, a request to participate in research into forecasting accuracy was extended to more than 50 firms. Interest in the project was evidenced by eighteen firms. Of these, twelve firms provided usable empirical data while the other six firms limited their participation to an interview with a corporate executive. The type of data obtained were forecasts and actual results for various income statement classifications for as many years as was practicable, usually five years. Forecasted balance sheet data were excluded because executives generally stated that such data were very inaccurate or that the firm prepared a forecasted income statement only. Within this article, analysis is limited to forecasts of sales and net income because of their dominant role.

The article examines several problems in the events approach to accounting theory using distinction among terms. Terms used in any science theory may be grouped with reference to the "mode of verification." Verification of a value-inference term would require testing the consistency, necessity, and sufficiency of the inferential logic. The term "event" refers in a general way to an action, occurrence, or happening that could be described by one or more of an infinite number of properties, attributes, or characteristics. A primary need for any accounting theory is a taxonomy that satisfies the criteria of exclusiveness, exhaustiveness, efficiency, and effectiveness. A forecast may relate one kind of event to an expectation of that same kind of event. It can be temporal, as when the antecedent market values of a firm's common stock are used to forecast its subsequent market value. Like extrapolation, prediction may make formal use of statistical techniques. Any accounting observation or inference that is useless for forecasting, is useless for guiding action. If no accounting data were accurate in forecasting, then accounting would be useless for decision. If accuracy in forecasting cannot be established for accounting data, then the claim that accounting is useful for decision is an empty boast.

The article discusses the nature of decision models and information evaluation models. The first section presents a general framework, or model, for information evaluation. The second examines the nature of the operational model that would be constructed in order to apply the general framework in a specific setting. The information evaluation process is viewed in cost-benefit terms; and the cost-benefit, or value, calculation is developed from the point of view of an individual who decides what information to supply. Different signals may result in different decisions, and, therefore, the information evaluator must develop a conditional probability distribution over the future events for each possible signal. Decision models seldom represent as controllable variables all actions that must be taken. Most mathematical models do not attempt to include detailed predictions of individual events. One simplified and well-known method for selecting information systems is to base the selection on personal opinion. Some insights that can be developed by such an exploration were then related to information choice issues and information research methods.