W2 seminar WebCT

W2 seminar WebCT - BUS 421 Week 2 Decision Usefulness of...

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BUS 421 Week 2 Decision Usefulness of Accounting Information Please sit with your group
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Agenda Presenter Previous seminar(s) Karel Scott Chapter 2 Karel Discussion questions / game Class Sharma and Iselin (2003) Karel Break (10 minutes) Scott Chapter 3 Karel Questions throughout seminar and MCs Class Summary Karel Week 2: Agenda
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Review of last week Objective of this course: Understand accounting issues and the role of accounting in society Why? to be able to adapt to new situations to be able to provide what users need Week 2: Previous seminar
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When is information useful? Review of last week Week 2: Previous seminar
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What are some characteristics that increase the information's potential to affect users' decision? Relevant Predictive about the future prospects of the firm Reliable Verifiable Neutral Representational usefulness Review of last week Week 2: Previous seminar
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Scott Chapter 2 Overview Accounting under ideal conditions: financial statements are both relevant and reliable. Two present value models: certainty and uncertainty. Investor perspective What is the value of the firm? What information do FS produce? Week 2: Scott Chapter 2
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i r + 1 1 Scott Chapter 2 Week 2: Scott Chapter 2
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With certainty : The best accounting system produces: V t = BV t NI t = V t × r NI has no information content But we don't have certainty. .. Scott Chapter 2 Week 2: Scott Chapter 2
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We get similar results if we have ideal conditions : Complete, known set of states Objective, known set of probabilities Fixed interest rate (r) Scott Chapter 2 Week 2: Scott Chapter 2
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Under ideal conditions we can handle uncertainty : • with un certainty, CF i = ? V t = R -1 CF t+1 + R -2 CF t+2 + … + R - CF t+ becomes V t = R -1 E [CF t+1 ]+ R -2 E [CF t+2 ]+ … + R - E [CF t+ ] Scott Chapter 2 Week 2: Scott Chapter 2
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• Expectation ~ E[CF t+1 ] E[X] is expected value of X Often realized value of X is different from E[X] Example Roll a dice: equal probability of getting the following values: 1, 2, 3, 4, 5, 6. Expected value of a roll E[X]: – E[X] = ( 1 / 6 )(1)+( 1 / 6 )(2)+( 1 / 6 )(3)+( 1 / 6 )(4)+( 1 / 6 )(5)+( 1 / 6 )(6) = 3.5 With a pair of dice: E[X] = 7 Scott Chapter 2 Week 2: Scott Chapter 2
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With uncertainty E[CF i,t ] = ? • CF i,t is a function of the state of nature What is a state of nature ? Scott Chapter 2 Week 2: Scott Chapter 2
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Scott in Example 2 states: s 1 = Economy is bad (get $100) s 2 = Economy is good (get $200) Probabilities: p 1 = 50% p 2 = 50% Expected cash flows: E[CF t+1 ]=(0.50)($100) + (0.50)($200) = $150 Discounted at 10%: V t = BV t = $136.36 Scott Chapter 2 Week 2: Scott Chapter 2
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In reality…. s
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This note was uploaded on 06/09/2011 for the course BUS 421 taught by Professor Karel during the Summer '11 term at Simon Fraser.

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W2 seminar WebCT - BUS 421 Week 2 Decision Usefulness of...

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