The Two Cardinal Rules That Financial Analysts Follow to Avoid

question 71

True/False

The two cardinal rules that financial analysts follow to avoid capital budgeting errors are (1) capital budgeting decisions must be based on accounting income,and (2) all incremental cash flows should be considered when making accept/reject decisions.

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Definitions:

Fair-value Method

An accounting strategy used for valuing and assessing assets and liabilities based on current market prices or estimates.

Equity Method

An accounting technique used to assess the earnings of an investment in another company by recognizing the income earned proportional to ownership interest.

Accounting Principle

A guideline or rule that shapes the theoretical basis for accounting practices and financial reporting.

Intra-entity Gross Profits

Profits realized from transactions conducted within the same legal entity, often requiring elimination for accurate consolidated financial reporting.