Question 1

A primary disadvantage of the amortized cost method of accounting for fixed assets is that the resulting values may not reflect the possible disposal value of the asset.

Accepted Answer

The amortized cost method calculates the value of an asset by spreading the cost over its useful life, which may not necessarily reflect the asset's disposal value. This can result in the over- or undervaluation of assets in the financial statements.

Question 2

Typically, when a company owns equity securities of another company, this asset is shown on the balance sheet at replacement cost.

Accepted Answer

Equity securities of another company are usually shown on the balance sheet at fair value, not replacement cost.

Question 3

Under GAAP, intangible assets that are developed internally are generally not recognized.

Accepted Answer

Under GAAP (Generally Accepted Accounting Principles), internally developed intangible assets, such as research and development costs, are expensed as incurred and not capitalized, meaning they are not recognized on the balance sheet as assets.

Question 4

If a company that uses GAAP changes its valuation method for accounting for important assets, it must disclose this change of methods.

Accepted Answer

According to GAAP guidelines, whenever there is a change in accounting method, it must be disclosed in the financial statements or footnotes. This helps to maintain transparency and consistency in financial reporting.

Question 5

A key difference between the liquidation value of an asset and the exit price of the asset is that the exit price is assumed to occur in orderly markets, and the liquidation value is a price if there must be an immediate sale.

Accepted Answer

The statement is true. The exit price assumes a sale in an orderly market, while the liquidation value assumes an immediate sale regardless of market conditions.

Question 6

Under IFRS, all assets in the balance sheet are shown at fair value.

Accepted Answer

Under IFRS, assets are generally shown at their cost less any accumulated depreciation or impairment losses, unless the asset is classified as held for sale or is part of a group of assets being measured at fair value. Therefore, not all assets in the balance sheet are shown at fair value under IFRS.

Question 7

The "information perspective" on accounting says that even if company financial statements use different valuation methods for different accounts, the statements may still provide useful information to users.

Accepted Answer

The information perspective on accounting focuses on the usefulness of financial statements in providing information to users, even if different valuation methods are used for different accounts. Therefore, even if there is diversity in accounting methods, the statements can still be useful.

Question 8

Even if company financial statements use different valuation methods for different accounts, people can still base contractual arrangements on financial statement information.

Accepted Answer

While companies may use different valuation methods for different accounts, the financial statement information can still provide a basis for contractual arrangements. This is because financial statements provide a snapshot of a company's overall financial health, including its assets, liabilities, and equity, which can be used to assess creditworthiness and other key factors that are important in contract negotiations. However, it is important to note that different valuation methods can impact the accuracy of certain financial statement accounts, particularly when it comes to estimating the value of intangible assets or other items that may be difficult to measure objectively.

Question 9

One characteristic of a "perfect" market is zero transaction costs.

Accepted Answer

In a perfect market, there are no impediments to buying or selling goods or services, which includes zero transaction costs. This means that buyers and sellers can trade without any additional expenses beyond the price of the good or service itself.

Question 10

A "perfect" market is defined as one that is totally efficient, with perfect information and zero transaction costs.

Accepted Answer

A perfect market is defined as one where there are no transaction costs and all information is perfectly available to all participants. This creates a completely efficient market where price reflects all available information.

Question 11

The term for a market that is totally efficient, with perfect information and zero transaction costs, is a "complete" market.

Accepted Answer

The term for a market that is totally efficient, with perfect information, and zero transaction costs, is a "perfect" market, not a "complete" market. A complete market is one where there are enough assets for individuals to perfectly hedge every possible risk.

Question 12

One characteristic of a "complete" market is perfect information.

Accepted Answer

While perfect information is desirable in a complete market, it is not a defining characteristic. A complete market is one in which all possible assets can be traded and all possible contingencies are accounted for. Perfect information would facilitate trading in a complete market, but it is not a necessary condition.

Question 13

In a "perfect" market, entry values are the same as exit values.

Accepted Answer

In a perfectly competitive market, there are no barriers to entry or exit, which means that there are no differences between entry values and exit values. This is because there are many buyers and sellers who have perfect information about the market, and no single participant has the ability to influence prices. Therefore, prices are determined solely by supply and demand, and profits are driven down to zero in the long run.

Question 14

The real estate market is an example of a "perfect" market.

Accepted Answer

The real estate market is not a perfect market as there are factors that can affect the supply and demand of properties such as government laws, zoning restrictions, and environmental regulations. Additionally, the transaction costs involved in buying or selling a property, such as realtor fees and closing costs, can also impact market efficiency.

Question 15

The market for U.S. Treasury bonds is closer to a perfect market than the market for houses.

Accepted Answer

The market for U.S. Treasury bonds is highly liquid, with a large number of buyers and sellers, low transaction costs, and readily available information. In contrast, the market for houses is less standardized, with high transaction costs and information asymmetry between buyers and sellers. Therefore, the market for U.S. Treasury bonds is closer to a perfect market than the market for houses.

Question 16

The "net realizable value" of an asset is what it can be sold for, ignoring any transaction costs.

Accepted Answer

Net realizable value considers the estimated selling price in the ordinary course of business minus any costs of completion, disposal, and transportation.

Question 17

The "exit price" of an asset is what it can be sold for, ignoring any transaction costs.

Accepted Answer

The exit price of an asset is the price that an investor would receive if they sell that asset, without considering any transaction costs.

Question 18

The FASB's defines "fair value" of a financial asset as the price it would be sold at in an orderly market, with willing market participants. Transaction costs are not considered.

Accepted Answer

The statement accurately summarizes the FASB's definition of fair value for financial assets.

Question 19

Under IFRS, all assets are valued at fair value.

Accepted Answer

Under IFRS, some assets are valued at fair value (such as financial instruments and investment properties), while others are valued at historical cost (such as property, plant, and equipment).

Question 20

Under GAAP, the same rules are used to value gain contingencies and loss contingencies.

Accepted Answer

Under GAAP, gain contingencies are not recognized until they are realized, whereas loss contingencies can be recognized when they are probable and can be reasonably estimated.

Quiz 7: Tackling the General Ledger