Financial Accounting Case

Financial Accounting Case

- Is there a difference in approach to valuation by US GAAP and IFRS?

According to The Financial Professionals Post (2010), there are fundamental differences between US GAAP and IFRS and how they are valued. Specifically, IFRS does not allow the Last In, First Out (LIFO) approach to inventory valuation. Additionally, under IFRS, property, plant, and equipment (PP&E) can be revalued at fair value whereas under GAAP, it is valued at the historical cost. Another major difference is that financial assets and liabilities are measured differently between GAAP and IFRS. Under GAAP, Fair Value is based on a negotiated price between a buyer and seller but under IFRS, fair value is generally seen as the price an asset could be exchanged.

- Distinguish between an expense (expired cost) and an asset.

The difference between and expense and an asset is often thought of being difference without a distinction but in accounting, an expense is what is used to generate revenue and used up. An example is prepaid insurance, a company pays $12,000 in annual property insurance at the beginning of each year so the initial outlay is classified as a current asset but as each month passes and the asset “expires” therefore must be re-classified as $1,000 per month as “insurance expense”. (Avercamp, n.d.)

- Distinguish between current and long-term assets.

The difference between a current and long-term asset can be described as

Current assets are those assets that can be quickly turned into cash through sales, or can be lent or leased to generate value or income for a company. The key to current assets is that they are designed to create company liquidity as well as fund daily operational costs and investments.

- Distinguish between current and long-term liabilities.

Current liabilities are defined as a company’s debt owed to a creditor that must be repaid within a 12-month period. To ensure short-term liquidity, current liabilities should be less than short-term assets (cash, accounts receivable, etc). (Nordmeyer, n.d.) Current liabilities is such a critical measure for a company that two of the most common ratios, working capital and current ration, are derived from it. Working capital is calculated by subtracting current liabilities from current assets. The current ratio is calculated by dividing current assets by current liabilities. (Avercamp, n.d.) A current ratio of more than 2-1 can enable a company the ability to expand by ensuring enough assets to expand product lines or stockpiling inventory.

Conversely, long-term liabilities are due more than a year