Premium
Accrual Accounting, Informational Sufficiency, and Equity Valuation
Author(s) -
NEZLOBIN ALEXANDER
Publication year - 2012
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2011.00428.x
Subject(s) - accrual , historical cost , valuation (finance) , throughput accounting , accounting , accounting information system , equity (law) , mark to market accounting , economics , cost accounting , book value , accounting method , market value , positive accounting , fixed asset , management accounting , fair value , business , microeconomics , financial accounting , production (economics) , earnings , political science , law
This paper studies accrual accounting and equity valuation in the context of a firm that makes repeated and overlapping investments in productive capacity. The analysis identifies a particular accrual accounting (depreciation) rule that is termed replacement cost accounting because the book value of existing capacity assets is set equal to the value that such assets would have if a competitive market were to exist for used assets. It is shown that replacement cost accounting aggregates past investment decisions of the firm without a loss of value‐relevant information. The intrinsic value of the firm can then be expressed as a function of current accounting data and certain parameters of the firm’s operating environment. Further, it is shown that replacement cost accounting is essentially the only accounting rule with this informational sufficiency property.