Question

based on any capital budgeting journal

1. Discuss why do managers focus on the impact that an investment will have on reported earnings rather than on the investment’s cash flow consequences?

Answer 1

As per the the capital budgeting journal, it comprises most of the decision making techniques for evaluating financial viability of the projects. Also the most important factor in these techniques is they take interest component into account while analysing the stream of cash flows. Time value of money refers to the concept which states that what will be the value of cash flows that is to be received in future as of now.

But the above scenario totally focus on the evaluating the financial viability of the project instead of ensuring the compliance with the reporting laws. Management of company balances both the parts as essential activities of an organization for the purpose of preventing choosing a non-yielding project and compliance with laws.

Managers do focus on impact that an investment will have an reported earnings instead of investment's cash flows. Such statement has been discussed in various journals as reason being the reported earnings are reported as a requirement of laws and regulations of the country. Such laws and regulations state that however, the company is engaged in high yielding project, but company should only report the value addiitions to the company from such project. Otherwise, the analysis part could never be part of compliance process as such analysis include lots of assumptions.

Therefore, managers do tend to focus on impact on reported earnings instead of investment's cash flow consequences.

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