Accrual income statements and present value models

Lindon Robison and Peter J. Barry

Agricultural Finance Review, 2020, vol. 80, issue 5, 715-731

Abstract: Purpose - This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer. Design/methodology/approach - AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return. Findings - PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent. Research limitations/implications - PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models. Practical implications - This paper provides guidelines for properly constructing PV models consistent with AISs. Social implications - PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis. Originality/value - This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

Keywords: Cash flow; Accrual income statements; Earnings and rates of return; Operating accounts; Present value models (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afrpps:afr-11-2019-0123

DOI: 10.1108/AFR-11-2019-0123

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