EBK FINANCIAL REPORTING, FINANCIAL STAT
8th Edition
ISBN: 9781337003193
Author: WAHLEN
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 2, Problem 1QE
To determine
State examples for each case of relevance and representational faithfulness.
Expert Solution & Answer
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.
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Students have asked these similar questions
“Some asset valuations using historical costs are highly relevant and very representationally faithful, whereas others may be representationally faithful but lack relevance. Some asset valuations based on fair values are highly relevant and very representationally faithful, whereas others may be relevant but lack representational faithfulness.” Explain and provide examples of each.
There are several asset pricing models used to determine an asset’s intrinsic value, the most popular being CAPM and APT. Why would an investor apply the Fama-MacBeth Method in asset pricing assumptions?
1. What is the basis for the estimation of the fair value of the impaired operating resource? For example, is the valuation based on an independent appraisal, or is it a management estimate?
Chapter 2 Solutions
EBK FINANCIAL REPORTING, FINANCIAL STAT
Ch. 2 - Prob. 1QECh. 2 - Asset Valuation and Income Recognition. Asset...Ch. 2 - Trade-Offs among Acceptable Accounting...Ch. 2 - Income Flows versus Cash Flows. The text states,...Ch. 2 - Prob. 5QECh. 2 - Prob. 6QECh. 2 - Prob. 7QECh. 2 - Prob. 8QECh. 2 - Computation of Income Tax Expense. A firms income...Ch. 2 - Computation of Income Tax Expense. A firms income...
Ch. 2 - Costs to Be Included in Historical Cost Valuation....Ch. 2 - Effect of Valuation Method for Nonmonetary Asset...Ch. 2 - Prob. 13PCCh. 2 - Prob. 14PCCh. 2 - Prob. 15PCCh. 2 - Deferred Tax Assets. Components of the deferred...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Interpreting Income Tax Disclosures. Prepaid Legal...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Analyzing Transactions. Using the analytical...Ch. 2 - Prob. 21PCCh. 2 - Starbucks The financial statements of Starbucks...Ch. 2 - Prob. 1BICCh. 2 - Prob. 1CICCh. 2 - Prob. 1DICCh. 2 - Prob. 1EICCh. 2 - Prob. 1FICCh. 2 - Starbucks The financial statements of Starbucks...
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Similar questions
- 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
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