Chapter7_ Solutions

Chapter7_ Solutions - Suggested Solutions to Assigned...

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Suggested Solutions to Assigned Problems in Chapter 7: 1, 8, 9 1. Strictly speaking the answer is yes, since post-revenue-realization assets such as accounts receivable are valued at the net amount expected to be received. This amount approximates present value if we accept that the time to collection is sufficiently short that discounting is not needed. Present value is a version of current value, consistent with a measurement approach, not a cost approach. Complete historical cost accounting for accounts receivable would require them to be valued at cost of the inventory or services sold until cash is received. A no answer can also be argued if we accept that the historical cost basis of accounting only holds up to the point in the firm’s operating cycle at which revenue is regarded as earned, usually the point of sale. Financial assets generated subsequent to this point can be valued at current value without violating the historical cost basis of accounting. 8. a. The increase in Ballard’s share price implies a low R 2 and ERC. There was a positive firm-specific (i.e., abnormal) return on Ballard’s shares in response to the increase in its reported loss (i.e., a negative change in earnings). This implies a low ability of net income to explain the market response (i.e., low R 2 ), and a negative ERC. Lev and Zarowin (LZ) argue that the primary reason for low R 2 and ERC is failure to record the fair value of self-developed goodwill, such as that resulting from R&D. Capitalization of all or part of R&D costs would reduce Ballard’s reported loss and even
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Chapter7_ Solutions - Suggested Solutions to Assigned...

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