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The Value Of Future Receipts From An Asset

Better Essays
Cyril FoxPetrov # 15
Professor Gruber
Learning Activity 5
March 2, 2015

Learning Activity 5

10. Relevant information enables investors to estimate the present value of future receipts from an asset. Relevant information helps investor predict future firm performance compared to reliable information that faithfully represents what it is supposed to represent.

When conditions are not ideal, a good amount of subjectivity and estimation is used to find the different sets of states of nature. These states of nature have different subjective probabilities that are estimated by the preparer. In order to discount future cash flows, an interest rate must be specified. All of these estimations of probabilities are subject to errors and different bias, therefore reducing the reliability of these estimates. This creates the need for relevant information to be unreliable.

On the other hand, reliable information, like historical cost of an assets or face value of debt, is not very relevant. Reliable information is not relevant because it does not involve any estimates or future payments or receipts. These costs are based on the market price at the acquisition date and since market values and interest rate fluctuate over time, these historical based valuations have little relevance to the current state of the firm or business.

13. From a balance sheet perspective under ideal conditions, inventory is valued at current value. This could be the present value of expected
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