Module 1 - Module 1 Accounting under ideal conditions This...

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Module 1 Accounting under ideal conditions This module defines the concepts of ideal conditions and illustrates preparation of financial statements when ideal conditions hold. Balance sheet values are on the basis of expected present values of future cash receipts from assets and liabilities. Net income is the change in the present value of the firm’s net assets during the period. Reserve recognition accounting (RRA) for oil and gas companies is used to illustrate the challenges of present value accounting when ideal conditions do not hold. The concepts of relevance and reliability of financial statement information are reviewed, and the reliability problems of RRA are explained. Historical-cost- based accounting is analyzed in terms of its relevance and reliability, and is found to provide a better trade-off between relevance and reliability than RRA. Define the concept of ideal conditions and outline the necessary assumptions that underlie the definition. Ideal conditions exist under conditions of certainty when o the future cash flows of the firm are publicly known with certainty o the single interest rate in the economy is given and publicly known Ideal conditions are then extended to conditions of uncertainty in which o a complete and publicly known set of states of nature exists o the probabilities of states of nature are objective and publicly known o the single interest rate in the economy is given and publicly known o state realization is publicly observable Explain and illustrate the concepts of states of nature and the probabilities of states of nature (both objective and subjective). States of nature, also called states for short, are uncertain future events that may affect the
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Module 1 - Module 1 Accounting under ideal conditions This...

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