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Using cash flows to determine value of an asset

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Why are we interested in cash flows rather than accounting profits in determining the value of an asset?

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Solution Summary

The 482 word solution discusses valuation for several categories of assets including the relationship of cash values to value.

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The question can have different answers depending on the type of asset being discussed:

Current assets by definition turn to cash within one year. When companies are planning cash flow and budgeting, the concern for current assets is that they will turn to cash at the amount listed on the balance sheet. For example, it is obvious that cash is cash, but accounts receivable may not all be collected. To attempt to value accounts receivable at a net realizable value, the allowance account for doubtful accounts reduces the gross value of accounts receivable to an amount that is expected to be collected.

Inventory presents a slightly more difficult valuation issue because there could be ...

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