FAT week 2 - FAT Lecture 2 Is there a theoretically...

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FAT Lecture 2 Is there a ‘theoretically pure/ideal’ system of accounting? => Need as starting point – not achievable in reality, but helps to set up framework for theoretical discussion => Assess current acc practice => Enables evaluation of HC system Theoretically ideal => Future eco prospects fully disclosed (div, CF, profits), that is relevant => Info also reliable (precise & free from bias) Approach => Ideal conditions of certainty => Ideal conditions of uncertainty => Appreciate that ‘ideal’ conditions X exist in real world/practice Meaning of ‘Certainty’ => FCF & cost of capital known by everyone in eco So no info asymmetry about firm’s current & future prospects PV model (under Certainty) => BS will show PV of total assets of firm => PV = discounted PV of FCF => Value-in-use FV = price that would be received to sell asset/ be paid to transfer a liability in orderly trans betw market participants
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= exit price/ opp cost Ideal Conditions of Certainty Assumptions => Known FCF & IR Basis of Accounting => PV Income recognition => As changes in PV occur Example: Sure Company Assume operate under ideal conditions of certainty. Acquired sole asset on 1 Jan 2005. Asset yield $500 @ end of each year (2005-2007), then no market value & disposal costs. IR = 6% Asset financed by ordinary shares, pay div of $50 @ end of 2005. 1. Provide B.S. @ 1 Jan 2005 PV = (500/1.06) + (500/1.06 2 ) + (500/1.06 3 ) = 1336.50 Asset 1336.50 S/h Equity 1336.50 2. Expected net income (2005) = Expected ROA 6% X $1336.50 = $80.20
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3. Value of sole asset (31 st Dec 2005) PV = (500/1.06) + (500/1.06 2 ) = $916.70 4. Profit for 2005 - P&L statement
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  • Fall '15
  • Accounting, Generally Accepted Accounting Principles, ideal conditions, FV Accounting

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