A Firm Has Prepared Two Different Models to Be Used

question 4

Essay

A firm has prepared two different models to be used for forecasting. One has a fairly large root mean squared error (RMSE), the other has a much smaller RMSE. Which forecast would you expect to give the more accurate prediction? Explain.

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Definitions:

Accrual

The accounting principle that income and expenses are recognized when they are earned or incurred, regardless of when the cash is actually received or paid.

Net Realisable Value

is the estimated selling price of goods in the ordinary course of business minus the estimated costs of completion and the necessary selling expenses, used in inventory valuation and impairment tests.

Depreciation

A method of allocating the cost of a tangible or physical asset over its useful life, recognizing the asset's wear and tear over time.

Asset's Value

The worth of an asset, which can be determined by factors such as market value, book value, or utility.