What Is Moving Average And Is It Used And Applied?

October 14th, 2009 Comments off
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Question:

I was asked by management to use moving average method to do the cash collection forecast.

Can you tell me:

(a) What is moving average

(b) How is it use and applied and who commonly uses it.

Suggested Answer:

(a)     What is Moving Average:

  • A moving average is an average  that is being revised as new information is received.
  • Accountants normally use the moving average to compute forecast as it represent the most recent observations.

Illustrated Example on how to compute Moving Average:-

Simply take the most recent observations to compute an average and update these observations continually as new data becomes available

Mr. A, the accountant has the following cash inflow data:

Month Cash collection $’000
March 30
April 40
May 50
Jun 20
July 30
August 60

Using the FIVE-month moving average, cash collection forecast in September is computed as follows:

(40+50+20+30+60)/5=40 = $40,000

(b)  Hence, the moving average is a prediction model used commonly by forecasters. The forecasters can select the number of periods to use on the basis of the relative importance attached to old data versus current data.

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Financial Accounting

 
 

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