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CHAPTER 01 SOLUTIONS 2011 FALL - Chapter01Solutions...

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Chapter 01 Solutions Pre Class Problems 1-15 a. The "principle of caution", according to Nils Vinge, ensures that the company maintains a strong financial position by choosing non- aggressive business practices. For instance, in order to ensure that the company is not burdened by high levels of debt which pose business risks, the company has a practise of always paying for business expenses with their own funds. In that manner, the company is using their own money to grow, rather than using the money of lender or investors to fund growth with the risk of not meeting future repayment obligations. b. Mr. Vinge learned that using its accounting information to monitor the company's financial health can lead to future success and growth. By keeping the accounting information up to date, they can monitor inventory levels, determine the need for price increases or markdowns, and to manage earnings by monitoring revenues and controlling costs. 1-16 a. While historical cost is a much more reliable measure, it measures only one attribute about the land—its purchase price. While this cost would be relevant to establish the amount of profit if the company were to sell the land, it would not be very relevant for much else. The current market value would be quite relevant if the company were trying to decide whether to sell the land. The selling price for a comparable site would therefore be relevant, but may not be a reliable measure of the fair value of the company’s land. While the site that sold was “comparable,” there will always be differences between various sites of land that may make them non-comparable. If the company intends to sell the land, then the market value may be the most relevant value to report on the statement of financial position (balance sheet). On the other hand, 1
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if the company intends to use the land to build a plant, then the current market value of the land would not be that relevant. Prudence would suggest that users must use caution when making judgements since the fair value of the land is subjective and will often include uncertainties b. The fair value would likely be most relevant to a banker because if the company defaults on the loan, the land would serve as
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