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Accounting Under Ideal Conditions
Accounting Under Ideal Conditions
Accounting Under Ideal Conditions
2-1
Copyright © 2009 by Pearson Education Canada
Chapter 2
Accounting Under Ideal Conditions
2-2
Copyright © 2009 by Pearson Education Canada
2.2 Ideal Conditions of Certainty
• Assumptions
– Known future cash receipts
– Given interest rate
• Basis of Accounting
• Present value
• Income Recognition
– As changes in present value occur
• Assumptions
– States of nature
• Known set
• State realization publicly observable
– State probabilities
• objective
• publicly known
– Given interest rate
» Continued
• Basis of Accounting
– Expected present value
• Income Recognition
– As changes in expected present value occur
• Relevant information
– Information about future firm performance
• Reliable information
– Representationally faithful
– Free from bias
– Verifiable
» Continued
• Incomplete markets
– Definition?
– Significance
• Cannot always use market value as proxy for present value
• Reasons for Incompleteness
– thin markets
– information asymmetry