Relevance of Accounting Theory in Forecasting Techniques and Default Prediction in an Organization in Nigeria

Abstract

Much have been done on forecasting and default or bankruptcy prediction, but not many of the earlier works have dwelt considerably on connecting accounting theory with the topic. This paper examines the relevance of accounting theory as a tool in forecasting techniques and default prediction in an organization in Nigeria, using organisations in industrial goods industry (sector) as a study area. Ex-post facto design is used this study because no attempt is made to control or manipulate relevant independent variables. Published financial statements of twelve (12) companies in the consumer goods sector with financial statements and reports covering the period of 2012 to 2017 are used. Findings revealed that liquidity ratios, leverage ratios and market ratios significantly predict and forecast firm default probability, while profitability do not significantly predict default likelihood. It is recommended that every stakeholders and entity issuing financial statements to ensure adequate disclosure of all relevant and material facts in the report to aid the analysts and other users make informed judgement from the content of the report.

Key words: Accounting Ratios, Accounting Theory, Bankruptcy Probability, Corporate Default, Default Predictions, Forecast Techniques.