Question

Criticisms of accounting: Many items in the financial statements are the product of historical costs. Similarly, many items on the income statement and balance sheet are a function of management estimates. Please identify items on the balance sheet that are valued at their historical cost, fair value, or another accounting method, and explain the impact on the overall balance sheet and income statement. You should include in your consideration the implications for investors of the method that is represented by GAAP

Answer 1

Absolutely right

In financial statement there are many items -

1.which are valued at historical cost for eg. Fixed assets , long-term investment, goodwill

Historical cost means assets are valued at nominal or original purchase costs. In essessnce it's the actual amount at you spent when assets are buying or recording.

2. Which are valued at fair market value for eg. inventory, short-term investment

Fair value is also important when assets are valued on fair value. If value decreased or increase in asset's value accordingly it may affect the depreciation cost for business or value of business. Generally fair value used in value the securities,short term investment, inventory, trade payable and receivable.

3. Which are valued at current cost. These assets are valued at cash & cash equivalents that we would have to pay similar item purchased. Liability are valued at present value of cash & cash equivalents that equal to obligation.

4. Which are valued at Net realisable value. Assets are valued that amount obtained by selling or disposal of assets and liabilities are carried at settlement cost.

5. Which are valued at present cost. Assets are carried at present value of future cost flows and expected to generate cash flaws at normal business.

These items are very helpful for decision making for a investor.

Investment decision of investor depends upon many financial factor like ratios, CFS, financial statement , profitability,growth of comoaby.

Financial accounting allow outside actors to observe the profitability and value of business. Investor can review the financial account to assesse liquidity, cash flaws, leverage and solvency

GAAP cover these thing to cover like revenue recognition, balance sheet item classification and outstanding neasument, if financial statement are not prepared as per GAAP then investor should be caution. Sometime company are used both GAAP or non GAAP measure and GAAP regulation required that non GAAP measure should be recognised in financial statement for public interest.