Question

Did the subprime crisis of 2008 illustrates the issue of the inability to correctly report which of the following cost priniciple?

A) fair value

B) replacement cost

C) long-term cash obligation

Answer 1

Did the subprime crisis of 2008 illustrates the issue of the inability to correctly report which of the following cost priniciple ?

Answer : A. Fair Value

Reason: Fair value proponents argue that historical costs of assets on a company’s balance sheet often bear little relation to their current value. Under historical cost accounting rules, most assets are carried at their purchase price or original value, with minor adjustments for depreciation over their life (as in the case of buildings) or for appreciation until maturity (as in the case of a bond bought at a discount to par). A building owned by a company for decades, therefore, is likely to appear on the books at a much lower value than it would actually command in today’s market.