Why are you intrested in cash flows rather than accounting profit in determining the value of the an assets?

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 Cash Flow is the inflow and outflow of money. It is necessary for daily operations, taxes, purchasing inventory and paying employees and operating costs. Profit means the surplus after expenses are deducted from revenue. Profit is the overall picture of a business and the basis on which tax is deducted.

                          We are intrested in cash flows rather than accounting profit in determining the value of the an assets because of mentioned reason.

1. The appropriate objective of a firm is not to maximize profits, rather it is to maximize the shareholder's wealth which depends upon present value of cash flow available to them and not accounting profit. 

2. Cash flows recognizes the time value of money by considering the actual cash inflows and outflows . On the other hand, accounting periods consider revenues which earned and expenses when incurred on the accural basis rather than which cash is actually effected.

3. The third reason for considering cash flows to be a better measure of economic viability as compared to accounting profits pretains to accounting ambiquities in determining net profit. 


Because of these reason we are intrested in cash flows. 

 

 

 

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