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'Top-Down budget' importance to Stock Price, Statement prep

Briefly describe the 'Top-Down Approach', and its relative importance to management in:

1) Pro-forma financial statement preparation and
2) The prediction of stock price performance.

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What is a Top down-approach?

A "top-down" approach to relative to its importance to management is largely dependent upon the type of organization and the style of leadership. Generally, the more numbers driven the business, the more likely it will be this approach as opposed to a "participative" or bottom-up approach.

In terms of financial pro-forma, this may be unrealistic and under-estimate the true costs of doing business, thus an indicator of an organization that does not trust its staff to adhere to their financial obligations. Conversely, it may indicate in a manufacturing organization that any and all "fat" have been trimmed out of the organization.

How does this impact stock performance? Well, stock performance is long-run tied to fundamentals. Information and daily market trading activity drives stock prices short-term. The closer an organization is to their ...

Solution Summary

Solution weights the pros and cons of a top-down demand forecast or "pro forma" financial statements as measured against preperation of the financial statements and predicted stock price performance. Solution explores the different outcomes possible as a result of management attitudes, organizational structure, and behavioral implications of the practice known to management as a "Top Down Approach".