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ACCA Applied Knowledge · Management Accounting · Summarising and analysing data

Which statement about the limitations of forecasting using time series analysis is correct?

Time series forecasting assumes seasonal variations keep the same pattern in the forecast period. It extrapolates past behaviour, so reliability falls the further ahead the forecast goes, and random variations remain unpredictable. Trends are not necessarily straight lines.

  1. AExtrapolating the trend is reliable however far into the future the forecast goes
  2. BSeasonal variations are assumed to remain constant in pattern over the forecast periodCorrect
  3. CThe method removes the need to consider random variations in past data
  4. DThe trend is always a straight line whatever the data show

Explanation

Time series forecasts assume the past trend and seasonal pattern continue. Forecasts further ahead are less reliable, so the first option is wrong. Random variation still exists and cannot be forecast, and trends need not be linear.

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