Reference no: EM132760000

Questions -

Q1. The Use of Current Value - The argument among accountants and financial statement users over the proper valuation procedures for assets and liabilities resulted in the release of SFAS No. 115 (see FASB ASC 320-19). The statement requires current-value disclosures for all investments in debt securities and for investments in equity securities that have readily determinable fair values and for which the investor does not have significant influence. The chairman of the Securities and Exchange Commission termed historical cost valuations "once-upon-a-time accounting." Historical cost accounting also has been criticized as contributing to the savings and loan crisis of the 1980s. During that period, these financial institutions continued to value assets at historical cost when they were billions of dollars overvalued. Critics of current-value accounting point out that objective market values for many assets are not available, current values cannot be used for tax purposes, using current values can cause earnings volatility, and management could use current value to "manage earnings."

Required -

1. Determine how current values might be determined for investments, land, buildings, equipment, patents, copyrights, trademarks, and franchises.

2. How might the use of current values in the accounting records cause earnings volatility?

3. Discuss how management might manage earnings using current cost data.

Q2. The Usefulness of the Balance Sheet - The recent emphasis on capital maintenance concepts of income as seen in the FASB's support for "comprehensive income" implies that balance sheet measurement should determine measures of income. That is, accrual accounting is to focus on measurements in the balance sheet, and because financial statements are articulated, measurements in the income statement are residual in nature.

Required -

1. Do you think this focus implies that the balance sheet is more important than the income statement? Explain.

2. How is the balance sheet useful to investors? Discuss.

3. Which measurements currently reported in balance sheets are consistent with the physical capital maintenance concept? Give examples.

4. Which measurements currently reported in balance sheets are not consistent with the physical capital maintenance concept? Give examples.