Usefulness and Reliability of Information Provided By Corporations

1489 Words3 Pages
bulb-icon

Recommended: Accounting standard in the business world

An ongoing concern in financial reporting is the usefulness and reliability of information provided by corporations. The financial accounting standard board defines usefulness as the information that is useful for the users in decision making (FASB, 2011). Reliability is inferred when the information is verified, objective, and can be relied on. Therefore, Statement of Financial Accounting Standards No. 157 standardizes the valuation and disclosure of fair value for assets and liabilities in order to achieve both usefulness and reliability. The reasoning for the hierarchy was due to the inconsistency in previous definitions and guidance (FASB, 1992).
Introduction to Fair Value Hierarchy
To begin, SFAS defines fair value as the value today of an asset or liability if it were sold or disposed in a transaction between third parties that are knowledgeable, independent, and active market participants (Barbera, 2007). The standard introduced a three level hierarchy that prioritizes the data companies use for determining the fair value. The three levels are the market approach, income approach, and cost approach. The market approach uses quoted prices that are readily available, income approach uses the present value or option-pricing models, and the cost approach represents the replacement cost. The market approach is the preferred measure of fair value, and cost approach is the least preferred.
Next, as stated before the market approach is the preferred measure of fair value because of the reliability. It is reliable because the fair value can be verified by observing or looking up the current or quoted price in the open market. For example, to ensure the stock price is being presented fairly, an individual can easily loo...

... middle of paper ...

...chniques used, and methods used to calculate the fair value. In conclusion, I agree with SFAS No. 157 emphasis on valuing assets or liabilities at fair value, because historical cost does not account for the change in value whether it be positive or negative effect due to the current market condition (Ryan, 2008). Instead it should be valued at the exit price which is the price that the asset or liability is worth if were to be sold right now taking into account that each party involved in the orderly transaction is knowledgeable, independent, and frequent buyer or seller in the market. Last, in order for the fair value to be effective disclosures must exist to give users the details of the measurements, valuation techniques used, and methods used to calculate the fair value in order to make a better decision on the entity's financial position (Barbera, 2007) .

Show More
Related

  • ACG 2021, Introduction to Financial Accounting, Fall 2000, Exam 1

    4021 Words  | 9 Pages

    B) assets are generally listed on the balance sheet at their historical cost, not their current value.

    Read More

  • Examining Financial Statements - Landry's Restaurants

    1117 Words  | 3 Pages

    Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).

    Read More

  • Nonprofit And For-Profit Accounting

    1034 Words  | 3 Pages

    In Inventories are sold, and they are purchased on a continuous basis. Due to the varying market conditions, the prices of the inventories may change and as a result, valuation of inventory is imperative. There are various methods that organizations use in valuing stocks. The most common methods are:

    Read More

  • Eskimo Pie Corporation

    1314 Words  | 3 Pages

    The second method we used to analyze the firm’s value was the Comparable Companies Method. We used the historical figures as of 1990 and Goldmans Sach’s Projections. With an average of 22.

    Read More

  • Jb Hi-Fi Limited Case Study

    756 Words  | 2 Pages

    a computer, is lower than its net realisable value (the estimated selling price). This is because in the notes of the Balance Sheet under Inventories it states, “Inventories are stated at the lower of cost and net realisable value.” The Plant and Equipment asset uses an alternative method which is cost minus accumulated depreciation minus impairment (when companies compare the market value with the value written down). Impairment is only used when the company feels necessary. Lastly Intangible assets, JB Hi-Fi use an alternative method which is cost minus accumulated impairment. For example JB Hi-Fi in New Zealand cost 14.7 million in 2016 but due to impairment charges in the current year it cost

    Read More

  • Accounting profit and True Profit

    996 Words  | 2 Pages

    Before being considered a measure of the true profit, reliability of profit figures shall be

    Read More

  • Pcb Case Study Summary

    961 Words  | 2 Pages

    Firms must always audit fair value for the purpose of determining possible impairment of assets. This is determined by analyzing cash flow.

    Read More

  • Gainesboro Machine Tools

    1953 Words  | 4 Pages

    ...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.

    Read More

  • Pcob Fraud Case

    1663 Words  | 4 Pages

    In addition, the auditors did not perform sufficient substantiate procedures for the valuation of the assets (10). Because the auditors only inquired to management about the value and only recalculated the amortization schedule, it was likely that the assets could have been materially misstated. The client could have set too high of a value on the assets and used an inappropriate useful life. The auditor should have recalculated how the client determined the value of the assets and the useful life.

    Read More

  • Market Value Investment Worth And Fair Value Case Study

    1187 Words  | 3 Pages

    Second: The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties (IVS 2013).This price takes into consideration what is the right price of commodity without any hidden agendas in the price, as opposed to Investment Worth, Fair value is calculated as the price of the end product which is fair to both suppliers and buyer. Also opposed to market value, here the supplier or buyer might not be willing to buy or sell at this price but other factors such as government policies might force them to sell and buy at this price. This price is mostly set by government and other regulatory bodies to protect consumers from monopoly market, and protect suppliers from

    Read More

  • Accounting Basics

    936 Words  | 2 Pages

    Accounting is a way to provide information that” identifies, records and communicates the economic events of an organization”(Weygandt, J., Kimmel, P., & Kieso, D., 2012). In order to ensure that businesses and accountants produce similar financial statements, they are held to generally accepted accounting principles or GAAP standards (Weygandt, et.al. 2012). In addition to GAAP standards, the Sarbanes-Oxley Act of 2002 was passed by Congress to help reduce unethical behavior by large businesses (Weygandt, et. al., 2012). The combination of the two provides reassurance to stakeholders or interested parties that the financial statements are uniform and provide reliable data. This is of the utmost importance for a business to be successful.

    Read More

  • A Critical Component Of Any Accounting Theory Course

    1218 Words  | 3 Pages

    According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.

    Read More

  • Judgement And Materiality In Accounting

    1287 Words  | 3 Pages

    Judgement is a notion of relevance and reliability in developing and applying accounting policies. It is a requirement of management that they exercise a high degree of professional judgement when selecting appropriate accounting policies in the preparation of financial statements that is relevant to decision-making and assessment needs of users. Management should also consider the applicability of IFRS and AASB in dealing with similar and related issues and then the definitions, recognition criteria in the Conceptual Framework when there is no IFRS standard or interpretation in certain circumstances that are specifically applicable. Management may also consider the most current pronouncements of other standard-setting bodies to the extent that do not conflict with IFRS and AASB in developing accounting standards and accepted industry practices by using a similar conceptual framework.

    Read More

  • Generally Accepted Accounting Principles

    1219 Words  | 3 Pages

    GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a company's financial statements. And even though variations might exist, one can make realistically confident conclusions when comparing one company to another, or when comparing one company's financial statistics to the statistics for the industry as a whole. Over the years the generally accepted accounting principles have become more multifaceted because financial transactions have become more intricate (Accounting Principles, 2011).

    Read More

  • Accounting Regulatory Bodies Paper

    721 Words  | 2 Pages

    The success of a company is very dependent upon its financial accounting. In accounting there are numerous Regulatory bodies that govern the accounting world. These companies are extremely important to a company because they set the standards when it comes to the language and decision making of a company. These regulatory bodies can be structured as agencies, associations, commissions, and boards. Without companies like the Security and Exchange Commission (SEC), The Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), Internal Accounting Standards Board (IASB), Internal Revenue Service (IRS), and other regulatory bodies a company could not make well informed decisions. In this paper the author will look at only four of them.

    Read More

More about Usefulness and Reliability of Information Provided By Corporations

Open Document