Class Notes (838,027)
Canada (510,626)
Business (3,287)
BU457 (19)
Bixia Xu (19)
Lecture 20

BU457 Lecture 20: The Information System
Premium

3 Pages
36 Views
Unlock Document

Department
Business
Course
BU457
Professor
Bixia Xu
Semester
Winter

Description
The Information System • For the financial statements to be useful, it must help predict future investment returns • Financial statements will be useful to investors to the extent that the good or bad news they contain will persist into the future • Financial statements can still be useful to investors even though they do not report directly on future cash flows by means of present value calculations • Lack of ideal conditions give the financial statements their information content • Information system – a table giving, conditional on each nature, the objective probability of each possible financial statement evidence item • Main diagonal probabilities: left to right, top to bottom • Off-main diagonal probabilities: right to left, bottom to up • Noise – weakening of the relationship between current financial statement information and future firm performance • Information system is informative, since it enables investors to update their prior probabilities to reflect on what they know, thereby affecting their decision • Financial statements that are highly informative, and the information system that underlies them, are often called transparent, precise, or high quality, since they convey lots of information to the investors • The extent of informativeness for investment decisions depends on the relevance and reliability of the financial statements o Ex. A move to value-in-use in accounting will increase informativeness only if its greater relevance outweighs the decrease in reliability • Supplementary current value information is one way to increase relevance without sacrificing reliability or vice versa • Informativeness also depends on the extent to which financial reporting is conservative o Conservatism: requiring a higher standard of verification to record gains than to record losses • The higher the main diagonal probabilities relative to the off- main diagonal ones, the
More Less

Related notes for BU457

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit