1. A) A company’s balance sheet reports stockholders’ equity of $2 billion, yet the same company...

A) A company’s balance sheet reports stockholders’ equity of $2 billion, yet the same company has a market value of $20 billion. What factors cause such a significant difference in the value of a company on the balance sheet vs. the stock market?

B) An asset is expected to be converted to cash in 18 months. Are there any circumstances in which this item would be classified as current on the balance sheet?

C) A liability is due three months from now. Are there any circumstances in which this item would be classified as non-current on the balance sheet?

D) You are considering investing in a company that recently reported a $700 million profit in the last fiscal year. However, your trusty accounting professor warned you that the company’s quality of earnings was very low. What does your professor mean? What factors could make a company’s quality of earnings low?

E) Differentiate between the retrospective and prospective approaches to reporting a change in accounting principle.

Solutions

Expert Solution

A) there is a difference between the book value and market value becuase book value of equity focuses on owned assets and owned liabilities and their book value which is recorded on historical cost basis. While the market value of the equity depends on the earning capacity of the company , goodwill, fair market value of comoany's assets, growth potential market oversight and investors demand for the shares.

B) assuming it to be a fixed asset, the asset cannot be classified as a current asset. As there is no reasonable certainty that the asset will be sold and the price at which it will be sold. Although if it is a part of inventory or prepaid expense, or advance made by the company , the asset could be classified as current after 6 months.

C) No, a liability due three months from now will not be classified as non current unless extra period for repayment is demand or there has been change in terms of the loan.

D) a company is said to have good quality of earnings when the earnings has been increased through improved operations such as increased sales or reduced cost. The professor might mean that the huge profit is one time earnings and not stable and also that the company manipulates it's earnings. The factors that could make quality of earnint low are one time events, economic factors such as inflation, industrial and company's risk etc.

E) Retrospective approach means that applying the change in principle to the financial results of the previous periods , as if the new principle had always been in use. While prospective means implementing new principle after the principle has came into existence.

ekkarill92 answered 1 year ago

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