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7 Cards in this Set
- Front
- Back
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Reported earnings will generate a greater earnings response coefficient when good news is expected to persist than when it is not expected to persist.
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Investors are assumed to use current earnings to help predict future firm performance. The longer a dollar of good news in current earnings is expected to persist into the future, the better future performance is, other things being equal. share price reflects investors’ expectations of future performance, the response of share price to current good news is greater when the persistence of that good news is greater.
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Chapter 2 Expected net income is also called "accretion of discount" |
the firm’s expected future cashflows are one year closer at year end than at the beginning. Opening firm value is rolled forward or “accreted”at the discount rate used in the present value calculations |
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Chapter 2 Under ideal conditions there is no need to make estimates when calculating expected present value |
-Under ideal conditions of certainty, future cash flows are known by assumption. Estimates are not applicable. -Under ideal conditions of uncertainty, by assumption, there is a complete and publicly known set of states, known cash flows on each state, and objective of those states. Also, the interest rate to be used for discounting is given. Then its a matter of simple calculation t |
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Chapter 2 Estimates are required to calculated expected present value when conditions are not ideal |
-Under non-ideal conditions, it is difficult to write down a complete set of states of nature and associated cash flows. -Even if these can be written down, its still difficult because objective state probabilities are not available. It is the most difficult, since these probabilities must be subjectively estimated. -interest rate is not necessarily given. -All the difficulty lead to reliability problems of lack of representational faithfulness and possible bias. The expected present value calculation can still be made, but it is an estimate because the probabilities and other values that go into it are estimates. |
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Chapter 2 question 10 |
Relevant information is information that enables investors to estimate the present value of future receipts from an asset (or payments under a liability). In an accounting context, relevant information helps investors to predict future firm performance, such as cash flows Reliable information is information that faithfully represents what it is supposed to represent. |
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Chapter 2 question 11 |
-discount rate might not reflect the firm’s cost of capital -Low reliability. RRA involves making a large number of assumptions and estimates. RRA deals with low reliability in part by requiring average prices of products for the period to be used (rather than prices anticipated when the reserves are expected to be sold)management may feel that average past prices bear little relationship to the net revenue the company will receive in the future. Furthermore, management may be concerned about low reliability of other estimates, such as reserve quantities. -market can change rapidly, making it necessary for the firm to make frequent changes in estimates -Investors may ignore. Investors may not understand the RRA information. management may believe the RRA information is so unreliable that investors will ignore it. If so, why prepare it? -Legal liability. Management may be concerned that if the RRA estimates are not realized, the firm will be subject to lawsuits from investors. Management’s reservations may be an attempt to limit or avoid liability |
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Chapter 3 question 4 |
The argument is probably made because of the “lumpiness” of certain cash receipts and disbursements. Cash payments for major purchases such as capital assets, and for borrowings such as loan proceeds, tend to occur at discrete intervals in large amounts. As a result, a firm could have what appears as a favourable or unfavourable cash flow, but one which results from the proceeds of a large borrowing or purchase of a capital asset rather than from recurring operating transactions. Given that financial statement users are primarily interested in the firm’s ability to generate cash from operations, it would be necessary to separate out the effects on cash flows of major transactions such as these. |
