06 The Measurement Approach to Decision Usefulness.pdf

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Accounting & Financial Management
AFM 401
Duane Kennedy

Current valuesFair valuethe price that would be received To sell an asset paid to transfer a liability in an orderly transaction between the market participants a the measurement date Exit price how much could you sell it for Value in usethe PV of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful lifeMeasurement approach Accountants have a responsibility to incorporate current values in the fs To help users predict firm performance Responsibility of the user to value the firm by finding info But accountants have the responsibility to help the users by providing more useful information In the past historical cost was used Now we see more use of current values Why Diff theories from diff people No clear answer just a trend that more current values are being usedSecurity Market Efficiency Academics want to know how efficient are the stock markets Not as efficient as claimed by Eugene FamaPost announcement drift ball and brown graphAfter time 0 the returns continue to drift up GN or down BN Efficient security anomaly Because all the reaction should occur at time 0 in an efficient market but it didnt Some investors are slower to respond than others Should be able to buy GN firmride the drift and sell in a little bit after Or short sell a BN firm and buy on a few monthsMarket response to accruals Break up net income into cash flows from operations and net accrualsNet incomecash flows from operationsnet accruals Qualities of earnings Cash flows from operations a re more persistent than the accruals So the cash flow number should have higher quality than accrual ERC should be higher if the net income has a higher proportion of cash flow from operations than net accruals If good newmore response w
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