1. Which would you expect to find more useful financial statements for evaluating management performance: financial...

1. Which would you expect to find more useful financial statements for evaluating management performance: financial statements based on fair value or historic cost? Why?

Expert Solution

For evaluating a management performance, I would choose fair value or Mark to market value.

There has been a heated debate between the users of historical cost and fair value. Where historical is cost is the actual acquisition value of the asset, fair value is the realizable value of the asset as of today if we were to sell it in the market.

Far value helps in gauging the company on real terms in many ways.

1. What is the actual value of assets today? It is because the performance is based on prices prevailing at that point of time.

2. Financial ratios or metric which employ balance sheet items to measure the performance of the company.

3. At the point of liquidation, stakeholders need to know the value of the company and performance as per fair value.

That being said there is a fatal flaw with fair value, if the market is negatively affected the price of balances sheet items can drop significantly which was seen earlier during the The Financial Meltdown, 2008.

jeff jeffy answered 1 year ago

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