ORIE ch 2 outline


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ORIE 350 CH 2 O UTLINE C H 2- B ALANCE S HEET : P RESENTING THE I NVESTMENTS INANCING OF A F IRM 1. A SSET R ECOGNITION 1. A firm will recognize a resource and an asset only if 1. The firm has acquired rights to its use in the future as a result of a past transaction or exchange 2. The firm can measure or quantify the future benefits with a reasonable degree of precision 2. All assets are future benefits; not all future benefits are assets 3. Executor contracts = involves a contractual exchange of promises to perform in the future but neither party has yet performed 1. mere exchanges of promises usually not recognized 2. A SSET V ALUATION 1. Acquisition/ Historical Cost = the amount of cash paid or the cash equivalent value of other forms of payment in acquiring an asset 2. Current Replacement Cost = “entry value”; the amount paid to gain entry to use the asset and enjoy its future benefits 3. Current Net Realizable Value = “exit value” net amount of cash (selling price – selling costs) that a firm would receive currently if it sold an asset 4. Present value of future net cash flows 5. The Valuation basis selected depends on the purpose of the financial report 3. G ENERALLY A CCEPTED A CCOUNTING A SSET V ALUATION B ASES 1. Monetary assets = include cash and claims to specified amounts of cash to be received in the future such as accounts receivable 1. Usually appear on the balance sheet @ net present value 2. Cash appears at the amount of cash on hand or in the back 3. A/R appear at the amount of cash firm expects to collect in the future 2. Nonmonetary assets = generate unknown amounts of cash in the future 3. Foundations for Acquisition Cost 1. Accounting assumes that a firm is a going concern (a firm will remain in operation long enough to carry out all of its current plans) 2. Reliability = the ability of a measure to faithfully represent what it purports to measure 3. Provides more conservative (lower) valuations of assets (and measures of earnings) vs. other methods 4. Conservatism = convention to justify acquisition cost valuations
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This note was uploaded on 04/05/2009 for the course ORIE 350 taught by Professor Callister during the Summer '08 term at Cornell.

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