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To plug or not to plug, that is the question. No plugs, no circularity: A better way to forecast financial statements

Author

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  • Ignacio Velez-Pareja

Abstract

Typical textbooks on corporate finance and forecasting and budgeting recommend closing" and matching the financial statements using what is known as a plug. A plug is a formula to match the Balance Sheet using differences in some items listed in it in such a way that the accounting equation holds. This is a very easy way to do it but it encompasses some risks. The risks are that certain numbers in the financial statements could be in error and still the plug would indicate that everything is correct because the Balance Sheet matches. In this teaching note we show how to construct financial statement without plugs and circularity."

Suggested Citation

  • Ignacio Velez-Pareja, 2007. "To plug or not to plug, that is the question. No plugs, no circularity: A better way to forecast financial statements," Proyecciones Financieras y Valoración 4320, Master Consultores.
    • Handle: RePEc:col:000463:004320
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    More about this item

    Keywords

    Forecasting; simulation; plugs; capital budgeting; investment policy; forecasting financial statements; double entry principle; accounting equation; unbalancing problem;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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