Financial decision making for long has been based on traditional accounting information. For long the financial decision makers estimates & determine the performance of the organization by measuring its profits. These profits are calculated from accounting transactions of the firm for a financial year. Besides financial ratios and other indicators like ROI etc. are also used to indicate the profitability of the firm but as these traditional ratios, profits related to historical earnings they fail to give true picture of the firm in real & futuristic terms. The real picture is that market price of any security issued in the primary market & traded in secondary market is determined by investors & the potential investors perception & expectations of firms securities future earnings. Investors assess the value of any firm on the basis of NPV the firm generates.
Accounting transactions reveal accounting profits. These profits have two major demerits:
. Accounting profits do not add back depreciation. Depreciation is a non cash expense, which is tax deductible hence accounting profits are tax should add back depreciation to give a real picture of profit.
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