Question

The primary purpose of the statement of financial position of a business is to reflect

A. The fair value of the entity’s assets at some moment in time.

B. The status of the entity’s assets in case of forced liquidation.

C. The entity’s potential for growth in stock values in the stock market.

D. Items of value, debts, and net worth. (correct answer)

A. Assets are reported in the balance sheet using various measurement attributes, including but not limited to fair values.

B. The balance sheet usually does not report forced liquidation values.

C. The future value of an entity’s stock is more dependent upon future operations and investors’ expectations than on the data found in the balance sheet.

D. In conformity with GAAP, the statement of financial position or balance sheet of business presents three major financial accounting elements: assets (items of value), liabilities (debts), and equity (net worth). According to SFAC 6, Elements of Financial Statements, “Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.” SFAC 6 defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” SFAC 6 defines the equity of a business as “the residual interest in the assets of an entity that remains after deducting its liabilities.”

Questions

A1. What is the term that commonly describes the alternative to fair value? (i.e. the opposite of fair value)

A2. State an example of an asset that is reported at fair value on the balance sheet (this would be an exception to the rule – Hint: the AOCI assignment and/or preview chapter 12, which is not in this course)

B1. If a company is forced to liquidate what would happen to the value of a company’s assets? Why?

B2. Why do we not report assets at liquidation value (you answer must have two key words in it)?

C. One of the major criticisms of GAAP and IFRS is that they fail to account for the true value of a company. Illustrate this concept further by contrasting the market capitalization of Microsoft versus its owners’ equity on the most recent financial statement. Please cite and reference your sources, which can include the attached Wall Street Journal article (Gallagher, 2019) and Microsoft’s recent financial statements.

D. What are the names of the accounting “elements” that correspond to items of value, debts, and net worth?

Answer 1

A1) Historical Cost method is alternate method of fair value method which is used for preparation of financial statements. Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) has suggested both method to prepare the financial statements. Organisations are free to opt either of the method in preparation and presentation of financial statements.

A2) Investment held for Trade are also reported on the basis of fair value method in balance sheet and if there is any gain or loss incurred due to variation between original cost and fair value then it will be recorded in income statement that result in increase in revenue and earnings for shareholders.

A3) Forced liquidation is also termed as compulsory liquidation where a company is unable to repay his debts and payment to creditors on time. In this situation, company may be compulsory liquidated on request of creditors and lenders. In this situation, all assets of companies are liquidated to repay the debts and payment of creditors.