From the information in Example 2.1, calculate total net income over the two-year life of...
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From the information in Example calculate total net income over the twoyear life of the firm, assuming that PV Ltd uses historical cost accounting with straightline amortization for its capital asset, while retaining all other assumptions. Verify that total net income over the life of PV Ltd equals the total economic net income that PV Ltd would report using present value amortization. b Do the same for Example Continue the assumptions about PV Ltd from part a while assuming that the state realization is bad and good, in years and respectively. c Use the fact that accruals reverse to explain why total net income over the two years in parts a and b above are the same under economic and straightline amortization. Are these results consistent with the empirical results of EHO and WW outlined above? d If all accounting methods produce the same total net income over a sufficiently long period, why does accounting policy choice and full disclosure matter to investors?
From the information in Example calculate total net income over the twoyear life of the firm, assuming that PV Ltd uses historical cost accounting with straightline amortization for its capital asset, while retaining all other assumptions. Verify that total net income over the life of PV Ltd equals the total economic net income that PV Ltd would report using present value amortization.
b Do the same for Example Continue the assumptions about PV Ltd from part a while assuming that the state realization is bad and good, in years and respectively.
c Use the fact that accruals reverse to explain why total net income over the two years in parts a and b above are the same under economic and straightline amortization. Are these results consistent with the empirical results of EHO and WW outlined above?
d If all accounting methods produce the same total net income over a sufficiently long period, why does accounting policy choice and full disclosure matter to investors?
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