1. What is the problem with book-value accounting? 2. What are off-balance sheet items?

1. What is the problem with book-value accounting?

2. What are off-balance sheet items? What types of firm have had a dramatic increase in off-balance sheet items? What is the problem with having a large amount of off-balance sheet items?

Expert Solution

Question 1:

Book value accounting does not consider the effects of price changes and market values in a dynamic business environment. It may not reflect the appropriate values of the assets and liabilities which may result in improper financial statements. This will also hinder right decision making for the stakeholders who may not be able to perceive the actual value of the financial items.

Question 2:

Off balance sheet items are financial items that do not form part of the main financial statements and are not included in calculations thereof. Firms who engage in financing majorly through short term and long term debt tend to usually have high off balance sheet items. Having too many off balance sheet items may mislead the investors as firms may try to hide key information through the off balance sheet items. Also ,it makes the financial statements look more leaner when the facts may actually be different.

jeff jeffy answered 2 years ago

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