Forecasting Financial Statements with No Plugs and No Circularity

The IUP Journal of Accounting Research & Audit Practices, Vol. X, No. 1, pp. 38-68, January 2011

Posted: 16 Mar 2011

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2011

Abstract

Textbooks on corporate finance and budgeting and forecasting recommend 'closing' the financial statements using what is known as a plug. A plug is a formula to match the Balance Sheet (BS) using differences in some items listed in it in such a way that the accounting equation holds. This is risky because certain numbers in the financial statements could be in error and still the plug would indicate that everything is correct. This paper shows how to construct financial statement without plugs and circularity. It explains how the plug works and what are its drawbacks. It presents a detailed example that can be used by any student, teacher or practitioner to properly construct consistent financial statements. The example shows how to relate different cells in the spreadsheet. Some criticisms against the no plug, no circularity approach are also presented and discussed. Finally, the paper suggests that the use of plugs should be discontinued while teaching forecasting financial statements and budgeting.

Suggested Citation

Velez-Pareja, Ignacio, Forecasting Financial Statements with No Plugs and No Circularity (March 15, 2011). The IUP Journal of Accounting Research & Audit Practices, Vol. X, No. 1, pp. 38-68, January 2011. Available at SSRN: https://ssrn.com/abstract=1786192

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

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