State examples for each case of relevance and representational faithfulness.
Explanation of Solution
Reliability is a characteristic of accounting as it relates to the extent of accuracy of the amount that are reported by an organization. All the amounts recorded in the financial statement are duly supported by evidences. Example: If an organization records assets at their acquisition and not their current market price then, the amount reported is not reliable.
Relevance is another characteristic of accounting and it can be explained as an attribute that has the capacity to impact the decision of the user's to financial statements. Example: Valuation of asset should incorporate all the amounts including acquisition cost and subsequent developments.
Examples for each of the following scenario:
- Reporting at historical cost (reliable and relevant): Amount of accounts receivables.
- Reporting at historical cost (reliable but not relevant): Acquisition of intangible assets at appreciated values.
- Reporting at fair market value (reliable and relevant): Marketable securities.
- Reporting at fair market value (relevant but not reliable): Internal valuation of intangible assets by a company.
Want to see more full solutions like this?
Chapter 2 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
- If a newly acquired asset is ‘held for sale’, the asset or disposal group will be measured at: A. Cost B. The lower of “Cost” and “Fair value, less costs to sell’ C. The higher of “Cost” and “Fair value, less costs to sell’ D. Fair value, less costs to sellarrow_forwardThe core difference between the rational entity impairment model (IFRS) and the cost recovery impairment model (ASPE) is that the IFRS approach waits until circumstances indicate that conditions are very bad before recognizing an impairment. the IFRS approach captures only declines in value, with no later recognition of any recovery. there are many differences; all of the above are true of the IFRS approach as compared to ASPE. the IFRS approach better reflects the economic circumstances underlying the asset’s usefulness to the entity.arrow_forwardMatch each of the following terms with the best definition. A. Theory of constraints B. Sunk cost C. Differential analysis D. Opportunity cost - Strategy that focuses on reducing bottlenecks. - Revenue forgone from an alternative use of an asset. - Not relevant to future decisions. - Evaluation of how income will change based on an alternative course of action.arrow_forward
- What situational circumstances can the Asset-based valuation be useful?arrow_forwardWhat serious consequences occur in an inaccurate estimate of asset needs?arrow_forwardProve that Homotheticity is required for the method of representative agent method to find the asset pricing. Otherwise, you have to use upper convultion to find the representative agent utilityarrow_forward
- Depreciation is a process of asset valuation where an asset's book value (cost less accumulated depreciation) often approximates it fair value. Do you agree or disagree? Explain why or why not.arrow_forwardWhen different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision rule True Falsearrow_forwardDiscuss the risks associated with short selling an asset. Use examples and empirical evidence in your answer.arrow_forward
- When identifying undervalued and overvalued assets, which of the following statements is least likely accurate?a. An asset is properly valued if its estimated rate of return is below the required rate of return.b. An asset is considered overvalued if its required rate of return is below its estimated rate of return.c. An asset is considered overvalued if its estimated rate of return is below its required rate of return.d. An asset is considered overvalued if its estimated rate of return is above its required rate of return.e. None of the abovearrow_forwardWhen the auditor wants to test the asset for impairment, the auditor would most likely be concerned with the recoverable amount of an intangible asset. For this purpose, the recoverable amount of an intangible asset is not: a. Fair value less cost to sell b. Value in use c. Fair value less cost to sell or value in use, whichever is lower d. Fair value less cost to sell or value in use, whichever is higherarrow_forwardWhat is the definition of Asset-Based approach in valuation?arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education