Chapter 1
Value-in-use, such as discounted present value of future cash flows.
Fair value, also called exit price or opportunity costs, the amount that would be received or
paid should the firm dispose of the asset or liability.
Current values are valuations that depart for the historical cost.
Well-working capital markets are markets where values of assets and liabilities equal, or
reasonably approximate, their real underlying fundamental values.
Structured investment vehicles (SIV) were created by financial institutions to securitize their
holdings of financial assets.
Asset-backed securities (ABS) were traches of similar credit quality financial assets.
Credit risk is het risk that a party to a financial contract, will be unable to meet its financial
obligations.
Liquidity put was created when the sponsor agreed to buy back the SIV’s asset-backed securities
should the market for them collapse.
Liquidity risk is the risk of a continuing decline in demand due to skeptical investors lack of
buying.
Counterparty risk is the risk that CDS issuers would not be able to meet their obligations.
Efficient contracting argues that the contracts that firms enter into create a primary source of
demand for accounting information.
Stewardship role of financial reporting is the alignment of manager and shareholders’ interests.
Reliability of accounting information benefits lenders by increasing their trust that the firm
manager will not take actions that harm their interests.
Conservatism means that unrealized losses from declines in value are recognized when they take
place, but gains from increases in value are not recognized until they are realized.
Adverse selection is a type of information asymmetry whereby one or more parties to a business
transaction, or potential transaction, have an information advantage over the other parties.
Moral hazard is a type of information asymmetry whereby one or more parties to a contract can
observe their actions in fulfillment of the contract but other parties cannot.
Fundamental problem of financial accounting is how to design and implement concepts and
standards that best combine the investor-informing and manager performance-evaluating roles for
accounting information.
Other comprehensive income tries to reconciling the investor-informing and manager
performance-evaluating roles. It’s a compromise to secure manager acceptance of current value
standards, since it excludes these gains and losses from net income. This means OCI includes
unrealized current value gains and losses resulting from fair value accounting.
Comprehensive income is the sum of net income and other comprehensive income.
Ideal conditions are when an economy where firms’ future cash flows, their probabilities and the
interest rate in the economy are publicly known with certainty.
, Chapter 2
Relevant information is information about the firm’s future economic prospects – that is, its
dividends, cash flows and profitability.
Relevant financial statement information gives information to investors about the firm’s future
economic prospects.
Dividend irrelevancy is when investors can invest any dividends they receive at the same rate of
return as the firm earns on cash flows not paid in dividends, the present value of an investor’s
overall interest in the firm is independent of the timing of dividends.
Reliable financial statement information faithfully represents what it is intended to represent.
Arbitrage profits are when market prices for identical goods and services are such that it is
possible to make a profit by simply buying in one market and selling in another.
States of nature are uncertain future events that affect firm performance, such as the state of the
economy.
Ideal conditions under uncertainty are characterized by (1) a given, fixed interest rate at which
the firm’s future cash flows are discounted, (2) a complete and publicly known set of states of
nature, (3) state probabilities objective and publicly known, and (4) state realization publicly
observable.
Estimation risk is the risk of not knowing which state of nature will happen.
Embedded value is a form of present value accounting that values the company’s insurance
business in force at discounted present value of policy amounts to be collected, net of costs.
Reserve recognition accounting (RRA) is of interest because it provides sufficient information
to prepare a present value-based income statement.
Standardized measure is supplemental disclosure of present value, discounted at 10%, of a
firm’s proved oil and gas reserves.
Recognition lag is the extent to which the timing of revenue recognition lags behind changes in
real economic value.
Incomplete markets means that market values need not exist for all firm assets and liabilities.
Value-in-use, such as discounted present value of future cash flows.
Fair value, also called exit price or opportunity costs, the amount that would be received or
paid should the firm dispose of the asset or liability.
Current values are valuations that depart for the historical cost.
Well-working capital markets are markets where values of assets and liabilities equal, or
reasonably approximate, their real underlying fundamental values.
Structured investment vehicles (SIV) were created by financial institutions to securitize their
holdings of financial assets.
Asset-backed securities (ABS) were traches of similar credit quality financial assets.
Credit risk is het risk that a party to a financial contract, will be unable to meet its financial
obligations.
Liquidity put was created when the sponsor agreed to buy back the SIV’s asset-backed securities
should the market for them collapse.
Liquidity risk is the risk of a continuing decline in demand due to skeptical investors lack of
buying.
Counterparty risk is the risk that CDS issuers would not be able to meet their obligations.
Efficient contracting argues that the contracts that firms enter into create a primary source of
demand for accounting information.
Stewardship role of financial reporting is the alignment of manager and shareholders’ interests.
Reliability of accounting information benefits lenders by increasing their trust that the firm
manager will not take actions that harm their interests.
Conservatism means that unrealized losses from declines in value are recognized when they take
place, but gains from increases in value are not recognized until they are realized.
Adverse selection is a type of information asymmetry whereby one or more parties to a business
transaction, or potential transaction, have an information advantage over the other parties.
Moral hazard is a type of information asymmetry whereby one or more parties to a contract can
observe their actions in fulfillment of the contract but other parties cannot.
Fundamental problem of financial accounting is how to design and implement concepts and
standards that best combine the investor-informing and manager performance-evaluating roles for
accounting information.
Other comprehensive income tries to reconciling the investor-informing and manager
performance-evaluating roles. It’s a compromise to secure manager acceptance of current value
standards, since it excludes these gains and losses from net income. This means OCI includes
unrealized current value gains and losses resulting from fair value accounting.
Comprehensive income is the sum of net income and other comprehensive income.
Ideal conditions are when an economy where firms’ future cash flows, their probabilities and the
interest rate in the economy are publicly known with certainty.
, Chapter 2
Relevant information is information about the firm’s future economic prospects – that is, its
dividends, cash flows and profitability.
Relevant financial statement information gives information to investors about the firm’s future
economic prospects.
Dividend irrelevancy is when investors can invest any dividends they receive at the same rate of
return as the firm earns on cash flows not paid in dividends, the present value of an investor’s
overall interest in the firm is independent of the timing of dividends.
Reliable financial statement information faithfully represents what it is intended to represent.
Arbitrage profits are when market prices for identical goods and services are such that it is
possible to make a profit by simply buying in one market and selling in another.
States of nature are uncertain future events that affect firm performance, such as the state of the
economy.
Ideal conditions under uncertainty are characterized by (1) a given, fixed interest rate at which
the firm’s future cash flows are discounted, (2) a complete and publicly known set of states of
nature, (3) state probabilities objective and publicly known, and (4) state realization publicly
observable.
Estimation risk is the risk of not knowing which state of nature will happen.
Embedded value is a form of present value accounting that values the company’s insurance
business in force at discounted present value of policy amounts to be collected, net of costs.
Reserve recognition accounting (RRA) is of interest because it provides sufficient information
to prepare a present value-based income statement.
Standardized measure is supplemental disclosure of present value, discounted at 10%, of a
firm’s proved oil and gas reserves.
Recognition lag is the extent to which the timing of revenue recognition lags behind changes in
real economic value.
Incomplete markets means that market values need not exist for all firm assets and liabilities.
