Accounting Notes Financial Accounting, Analysis and Valuation Notes
AC330: Financial Accounting, Analysis and Valuation
These notes cover the AC330 Financial Accounting, Analysis and Valuation course at LSE. "The course addresses the theory and practice of financial reporting. Accounting practices are examined in the light of historical development, regulatory requirements, theories of income and capital and other approaches to accounting theory and to the use of accounting information in business analysis and valuation.
Financial accounting with particular ref...
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Hicks - “the maximum value which he can consume during a week and still expect to be as well off at the end of the week as he was at the beginning”
To be made operational, must be clear on what is meant by “well off”
This is where his approximations come in, each of which has a concept of ‘capital’ that needs to be maintained to maintain ‘well-offness’
Ex ante = calculations made at the beginning of the year in the light of knowledge and expectations at that time
This is the one relevant for decision making
Ex post = calculations made at the end of the year in the light of knowledge and expectations at that time
Normally still very subjective since it is still based upon expectations of the future from time 1 onwards
The concept of income is only fully determinable and objective where there are ‘complete and perfect markets’ (Beaver)
“Income No. 1 is the maximum amount which can be spent during a period if there is to be an expectation of maintaining intact, the capital value of prospective receipts (in money terms)”
The level of welloffness is the NPV of future cash flows
Y01=D1+V1V0=rV0t0
The cash flow arising at time 1 + capital value at time 1 + capital value at time 0
Capital value = PV of FCF from time x onwards
i.e. the realised cash flow for the period plus the change in capital value over the period
Y01=D1t0+V1t0V0t0=rV0t0
Will always equal interest on the capital value at the start of the period
The versions differ in their treatment of windfall gains and losses
i.e. those that arise from differences between expected interest rates and actual interest rates, or changes in expected interest rates when we no longer assume interest rates are constant
Version A: Y01=D1t1+V1t1V0t0
The actual cash flow for the period, plus capital accumulation including windfalls
Version B: Y01=D1t1+V1t1V0t1=rV0t1
The actual cash flow for the period, plus capital accumulation excluding windfalls
Takes into account changes in interest rate, which changes the concept of “welloffness”
“The maximum amount the individual can spend this week and still expect to be able to spend the same amount in each ensuing week”
Capital is ‘the maintainable or permanent income”
Closer to the central concept of income
Ex ante (solving for Y): Y=r1t0(D1t0+V1t0Y)
Income number 2 will be affected if there are differences between expected and actual current year cash flows or differences between originally expected future cash flows and revised expectations
Version A:
“the maximum amount an individual can consume in a period and still expect to be able to consume the originally foreseen number 2 ex ante income in all future periods”
$\mathbf{D}_{\mathbf{1}}\mathbf{t}_{\mathbf{1}}\mathbf{+}\mathbf{V}_{\mathbf{1}}\mathbf{t}_{\mathbf{1}}\mathbf{-}\frac{\mathbf{original\ no.2\ ex\ ant}\mathbf{e}}{\mathbf{r}_{\mathbf{1}}\mathbf{t}_{\mathbf{1}}}$
Version B:
“the maximum amount an individual can consume in a period and still expect to be able to consume the same amount in all future periods”
Y=r1t1(D1t1+V1t1Y)
“the maximum amount of money which the individual can spend this week and still expect to be able to spend the same amount in real terms in each ensuing week”
Accounting ‘grounded in theory prevalent in economics’ as sought by the Board’s framework, is good in principle, provided the full theory is understood, used and interpreted properly
Has objectivity if income is confined to income from fully exchangeable assets where everyone faces the same prices and discount rates (Beaver and Demski, 1979)
Use of income ex-post is objective, but ex-post “bygones are bygones” and have no relevance to decisions (Hicks, 1946)
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AC330: Financial Accounting, Analysis and Valuation
These notes cover the AC330 Financial Accounting, Analysis and Valuation course at LSE. "The course addresses the theory and practice of financial reporting. Accounting practices are examined in the light of historical development, regulatory requirements, theories of income and capital and other approaches to accounting theory and to the use of accounting information in business analysis and valuation.
Financial accounting with particular ref...
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