Questions

1. What you think is the fundamental problem with financial statements based upon the
historic cost measurement principle used under US GAAP.?
According to the given case study the US financial accounting standard i.e. GAAP has
been criticised badly for being flawed. Some of the financial analyst also considers the
financial statements made under US gap to be completely irrelevant. The reason, behind
this irrelevancy is that US accounting standards are based on historic cost rather than
the actual value of the asset. Therefore, it is argued that the fair value of accounting
standards shall be used in order to make the financial statements more relevant. As per
the given case study, the use of fair value of accounting system will be able to provide
the users with clearer picture of the company’s financial health. Laux and Leuz, (2009)
explained some of the limitations in using the historical cost, according to the researcher,
the financial statement that are prepared using the historical cost only reflect the historic
facts about the company, and thus the current situation and the future prospects cannot
be determined using the historical cost method. In the same manner, Hollander, Kim,
Braun, Simeon, and Zohar (2009) added that one of the other problem associated with
historical accounting is that they ignore the changes occurring the market, sine the price
of a fixed assets are rebred at which it was bought. In the same manner, the income
statement that is prepared under historic cost method fails to reveal the true profit
earned by the company. Since the revenues are eroded on the current earnings,
however, the expenses are recorded using the historical value.
2. What do you think of the principle “...accounts must reflect economic reality” as a
core principle of measurement in accounting?
In the view of Scott, Leboyer, Hickie, Berk, Kapczinski, Frank, and McGorry, (2013),
accounting and economic reality might differ and conflict sometimes, the situation might
create issues for the CFO of the company while dealing the investors, lenders and the
analyst of the company. It has also been stated that a company that uses fair means of
accounting mostly confuses ort misleads its market participants. While creating the
applicable standards for the board, policy makers have made rule that undermines the
principles of accounting, it provides a true picture of country’s economic condition. It has
also been stated that the problem in the reliability occurs in determining which item shall
be included in the asset and in the balance sheet of a company. Bezemer (2010) added
that assets and liabilities of a company are used to calculate the true value of the
company and also in interpreting the financial ratios of the company. Daly and Farley
(2011) stated that choice of a company in financing can change the appearance of its
financial statement, the standards of GAAP mostly disregards the effect of economic
reality.
3. How would you measure economic reality?
4. In the view of Vollmer, Mennicken, and Preda (2009), although most of the concerns
of reliability are associated with the fair measure value, most of this measure is not
observed clearly in the market. However Speich (2011), much dependence is shown
towards such measures, currently the financial statements are replaced with the
measures that are considered to reliable. Furthermore, the given case has also
highlighted that in the contemporary business practice, the estimates of the assets
and the liabilities are based upon estimations. These estimations generally include
the receivable collections, selling potential of the inventories, life of useful
equipment, cash flows to be generated from the investments and litigation in the
environment.
5. Furthermore, the case study has also highlighted that the precision used in the
calculation of such measures such as depreciation is not a measure issue, however
the reliability of the accounting standards used are considered questionable for most
of the auditors and users of the financial statements. However, Csikszentmihalyi and
Larson (2014) stated that it shall also be noted that as the nature of the busies
differs widely therefore, the accounting measures used in different companies might
also differ, and thus building up an accounting system that can reflect the true, fair
and the real economic value might be a challenging task.

6. What is reliability in accounting?

7. As per the case study, reliability is defined as the information quality, stating that the
information provided is free from errors and biases; furthermore, it is also necessary
that the information clearly represents what it actually intends to present. In the
same manner, the given case has also highlighted that the reliability of the
information also lies upon the loyalty with which the information has been presented
and on the verification quality of the information, thus from the given case it can be
stated that faithful and verifiability are the two core components of reliability.

8. In the similar manner, Power (2010) defined accounting reliability as recording

information that be verified with the evidences. Some of the example of reliability in
accounting includes presentation of the purchased receipts, statements of bank,
appraisal reports, cancelled checks etc. Csikszentmihalyi and Larson (2014) stated
that documents generated from the third party such as the banks, suppliers and the
customers are verified critically under reliability. This is because the documents
generated from the third party are objected highly as compared to the documents
presented inside the company. Zio (2009) on the other hand added that it is difficult
to meet the reliability of the information while recording the reserves, such as
reserves related to sales return, inventory obsolesce and of doubtful debts, because
these reserves are based on opinion and are hard to verify. Therefore, it is also
stated that only those transactions shall be recorded that can be verified easily by
the auditors.