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About this document
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- 3 pages
- Price
- $3 one-time, yours to keep
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- Format
- Subject
- Accounting, Finance
- Module
- DQ 2 · Week 2
This document discusses the valuation of investments under US GAAP, arguing for the use of market value and assessing potential abuses. It covers Week 2 of the ACC 557 course.
What's inside
- US GAAP requirements for asset valuation
- Argument for using market value
- Potential abuses of market value approach
- Impact on public decisions
- Lower of cost or market rule
- Inventory valuation methods
Who it is for: Students taking the ACC 557 course. (Postgraduate)
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Summary
Investment valuation under US GAAP is discussed. Students see how the lower of cost or market rule works for inventory. The advantages and potential abuses of using market value are explored.
Lower of cost or market rule
The lower of cost or market rule applies to inventory. The market value is the current replacement cost. This rule is based on the idea that a drop in replacement cost means the inventory's usefulness has decreased.
Arguments for using market value
Students create an argument for using market value for investment valuation. The benefits of regularly adjusting to market value are discussed. Support for the argument is required.
Potential abuses of market value approach
The potential abuses of companies using a market value approach to investment valuation are assessed. The impact on public decisions relying on this information is considered.
Applying the rule to inventories
The lower of cost or market rule is applied to inventories for financial reporting. The rule is an example of the conservatism convention. The rule is applied by 80% of 600 large companies.
Key terms
- Lower of cost or market rule
- The rule that inventory is valued at the lower of its cost or its market value.
- Market value
- The current replacement cost of inventory.
- Conservatism convention
- The principle that losses are recognized before an actual transaction takes place.
- Historical cost accounting
- The method of valuing inventory at its original cost until it is sold.
- Replacement cost
- The amount that would be required to replace the firm’s inventory.
- AICPA survey
- A survey conducted by the American Institute of Certified Public Accountants.
Questions this document helps with
- How does the lower of cost or market rule work?
- Can market value be used for investment valuation?
- What are the potential abuses of using market value for investment valuation?
Summary written with AI from the document's text.
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