Question

In: Accounting

Which one the following statements is correct? 1. On the balance sheet, total assets equal total...

Which one the following statements is correct?

1. On the balance sheet, total assets equal total liabilities minus total equity.

2. GAAP accounting standards do not allow firms to value intangible assets on their balance sheet.

3. Equity is the value of the firm's assets after its creditors have been paid off.

4. An increase in cash reduces the liquidity of a firm.

Solutions

Expert Solution

Option 2 is correct, that too partially. ( GAAP accounting standards do not allow firms to value intangible assets on their balance sheet. )

Explanation:

This is because it is mentioned in GAAP Guidelines that a firm cannot list intangible assets on balance sheet unless they are acquired. i.e., if the intagible assets are internally developed, for instance, brand name, it cannot be shown on balance sheet, according to GAAP, because of the reason that accurate valuation and useful life cannot be identified. On the contrary, if the intangible assets are acquired, then they have identifiable life and are listed at purchase price less amortization.

Explanation of why other statements are incorrect:

Statement 1 is incorrect because:

On the balance sheet, total assets equal total liabilities plus total equity.

Statement 3 is incorrect because Equity is the value of the firm's assets after its debts and liabilities have been paid off.

Statement 4 is incorrect because An increase in cash increases the liquidity of a firm, since cash is a liquid asset.


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