B. the Use of Current Values in the Accounting Records Cause Earnings Volatility Because

Justin D. Bost October 7, 2009 Chapter 7 and 8

Case 7- 2

a. The current values for investments might be determined by fair value, amortized

cost, or the result of applying the equity method. Land is valued by allocating the

cost of the land to the various periods benefiting from their use. Buildings and

equipment are valued by the carrying value between the cost and the accumulated

depreciation. Patents, copyrights, trademarks, and franchises might be valued as

intangibles and disclosed at the net amount of their cost less amortization.

b. The use of current values in the accounting records cause earnings volatility

because the current value is changing so frequently or it is too difficult to

ascertain a reliable figure that investors can count on. There is also the threat of

managers using current value for earnings management and issues like these can

cause significant fluctuation.

c. Managers will value their assets when that certain asset is very scarce and the

price to replace it is very high, or vice versa. If the assets are placed at a higher or

lower value that can drastically affect certain ratios or other assessment tools. If

the figures are being placed at the amount that managers would like them then

there is really no indication of what the true value is to the company.

d. There are four main aspects to SFAS No. 157 that affect the use of fair value

measurement in financial. (1) It provides a new definition of fair value. (2) A fair

value hierarchy used to classify the source of information used in fair value measurements. (3) A new disclosures of assets and liabilities measured at fair

value based on their level in the hierarchy.

Case 8- 2

a. Trading securities are securities held for resale. Securities available for sale are

securities not classified as trading securities or held to maturity securities.

Securities held to maturity are debt securities for which the reporting entity has

both the positive intent and ability to hold until they mature.

b. All trading securities are reported as current assets on the balance sheet.

Individual held to maturity and available for sale securities are reported as either

current assets or investments as appropriate. The appropriate classification is to be

based on the definition of current assets provided in ARB No. 43.

c. The argument for current value with all marketable securities is relevance.

Current value gives the user the most up to date figures and therefore is more

relevant to the current financial position of the company. The argument against

using current value is reliability. All marketable securities’ values change by so

much and so frequently that the most reliable value to use the historical cost.