Chapter_2_-_Accounting_under_Ideal_Conditions_(Group_A).pptx

Group A Stephanie Cenedese Nicholas Ferguson Elisa Martone John severin Marcus Traynor  Chapter 2 Accounting Under Ideal Conditions AGENDA Present Value Model under Certainty Present Value Model under Uncertainty Reserve Recognition Accounting (RRA) Historical Cost Accounting Non-existence of True Net Income Article: A Matter of Principles Present Value Model Provides most relevant information to users of financial statements “information about a firm’s future economic prospects (dividends, cash flows, profitability)” Relevant financial statements need to be reliable “information that faithfully represents the firm’s financial position and results of operations” Present Value Model under Certainty Certainty: future cash flows of a firm and the economy’s interest rate are publicly known which can also referred to as ideal conditions Example: One asset firm that generates $150 per year for two years with no liabilities and has a value of $0 at the end of the two years. Interest rate = 10% Present Value Model under Certainty Net income for the year: $260.33 x 10% = $26.03 Balance Sheet As at Time 0 Capital asset, PV $260.33 Shareholder’s equity $260.33 Income Statement For Year 1 Accretion of discount $26.03 Present Value Model under Certainty *Note: assuming there is no dividends to be paid Recall: At time 0, PA0= $260.33 For year 1, accretion of discount = $26.03 Balance Sheet As at End of Year 1 Financial Asset $150.00 Cash 136.36 Capital asset, PV $286.36 Shareholder’s equity $260.33 Opening Value 26.03 $286.36 Present Value Model under Certainty NOTES 1. NBV of capital asset at any year-end = PV 2. Accretion of discount is also referred to as ex ante or expected net income Since all conditions are certain, expected net income = e