Alternative Measurement Models

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Alternative Measurement Models

• Present Value
• Net Cash Flow
• Original Transactions Value
• General Price Level
• Replacement Cost
• Market Value

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TEN WAYS TO COOK THE BOOKS

• 1. Prematurely recognize income
• 2. Treat operating leases as sales
• 3. Inflate inventory by improper application of
  LIFO inventory costing
• 4. Include fictitious amounts in inventory
• 5. Failure to recognize losses through
  write-offs and allowances

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TEN WAYS TO COOK THE BOOKS

• 6. Capitalize versus expense certain costs
• 7. Include non-recurring gains in operating
  income
• 8. Overvalue marketable securities
• 9. Create sham year-end transactions to boost
  reported earnings
• 10. Change accounting practices without
  disclosing the changes

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Information for Decisions
I
Scarce
Unlimited
Economic (allocation) decisions
Resources
Wants
Accounting information
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Steps in the Decision Process
Identify the Problem
Identify Alternative
Evaluate Alternatives
Choice
Take Action
Felt Need
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AUTO REPLACEMENT PROBLEM
You need a new set of wheels. Cost to operate
present vehicle .25 per milr. (includes cost
of oil, gas, depreciation, etc.) Est. annual
roundtrip mileage 24,000 miles. No bus routes
to intended destination. Weather rules out
purchase of motorcycle. You have a limited budget.
Facts
Alt. 1
Alt. 2
Chevy (6 cyl.)
Fiat (4 cyl.)
4,500
6,900
Cost of pre-owned car
Estimated useful life
3 yrs.
3 yrs.
Est. operating expense
.08/mile
Year 1 .10/mile
Year 2 .11/mile
.07/mile
.12/mile
Year 3
.06/mile
Decision problem Which auto should you
buy? Computations Chevy Fiat sacrif
ices benefits
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Identifying the problem
a. Specify an objective function a statement
that identifies those attributes of the
alternatives that are directly related to your
felt need. b. Identify decision constraints
factors which limit your ability to consider
certain alternatives. c. Formulate a decision
rule a statement that helps us to choose among
alternatives. What we are doing is setting up a
model of investment choice that identifies what
information is decision-relevant.
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Identifying Alternatives

Predicting expected consequences associated with
each alternative course of action
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Chevy Fiat costs
4,500 6,900 savings (.25 - .10) 24,000
3,600 (.25 - .08) 24,000 4,080 (.25 - .11)
24,000 3,360 (.25 - .07) 24,000 4,320 (.25 -
.12) 24,000 3,120 10,080 (.25 - .06)
24,000 4,560 12,960 Total net benefits
5,580
6,060

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Chevy
Fiat
Total net benefits 5,580/3
6,060/3
1,860/year 2,020/year
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Information any item of intelligence that
improves our ability to
predict future events
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• Effective decision making involves achieving
  a proper balance between
• a. expected outcome of a decision
• b. cost of making the decision

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Role of Accounting in Society
1. provide information useful for
decision-making 2. provide information at a
reasonable cost