FIN621 GDB Solution & Discussion Last Date:24-11-2010

[+ M.Tariq Malik]

Discussion Question

“Suppose you are working as an accountant and the president of your firm Mr. Ali has a little back ground of accounting. This morning, he approached you and said: “Last year we purchased a piece of land for Rs. 200,000. During this, the inflation has driven prices up by 12 %, and an expert has also just told me that we can sell this land for Rs. 300,000 whereas our balance sheet still shows the land at Rs. 200,000. It should be valued at Rs. 300,000 or at least at Rs. 224,000 (after the effect of 12% inflation)”.   Identify accounting principle(s) (GAAP) applicable to this situation which negates Mr. Ali’s Claim. ”   Note: You are supposed to mention just name of the relevant accounting Principle(s)

[+ M.Tariq Malik]

Solution:-
According to me two principles are against the Mr. Ali Claim

1) Going Concern
2) Cost Principle

For more details Check handouts and read these headings....

[+ M.Tariq Malik]

this is not final solution discuss below


Prudence principle: when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked


Cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now reported at market values.

[Yasir Hussain]

Asllam 0 Alaikum,
All Frdz,
THESE ARE MY VIEWS ABOUT GDB SOLUTION...........KINDLY CRITICIE ME PLZZZZZZZ

As we know that land is recorded at historical cost and other assets at Book value.
here the topic is about Land.................so.......................
for LAND reason, there are just two principle of Generally Accepted Accounting Principles (GAAP), that fits this situation.

1. Cost Principle: " Valuation and recording of assets at cost ".
This principle negates the Mr. Ali's claim about valuation of asset (LAND) at current market value. because this
principle tells that assets should be recorded at cost (historical cost).

2. Going Concern Principle: "connected with cost principle, assets acquired for use and not for resale."
This principle negates the Mr. Ali's claim about selling of land in order to earn revenue. This principle urges that
assets are acquired for use not for resale.

Regards,
YASIR HUSSAIN QURESHI
MBA (Finance) - Last
Virtual University of Pakistan
[e-mail]
Cell : 0333-7575699

[Muhammad Asif Javaid]

LOWER OF COST OR MARKET PRINCIPAL

Manager Finance
Muhammad Asif Javaid
Pak Agro Packaging Pvt Ltd
G-8/2 Islamabad
[e-mail]
03145345353

[==‎aTT!tuDe bRe@kEr]

i think is cost principal ........
czzzzz its bbases on historical cost orignal book value

N Basic Accounting deal with Orignal Value

[Waseem Arbab]

I think it is Objectivity principle , principle provide the definite and factual basis for asset valuation.

[Shahid]

Just 3 concept oppose the valuation of fixed assets
+Cost principle(historical value recognition)
+Going concern assumption(fixed assets are not for resale purpose,thats y valuation doesn't matter
+The objectivity Principle(assets are valued verifying by independent expert)

These three principle are reject the purpose of revaluation in "GAAP"Remember IAS and FRAS standards promote revaluation of fixed assets,i think IAS 7,OR IAS8(Revaluation)

"Error & ommision are accepted"

Regards

[Assassin's Creed]

So what is the final answer?

[AliRaza]

what is final answer

[+ M.Tariq Malik]

Last year we purchased a piece of land for Rs. 200,000. During this, the inflation has driven prices up by 12 %, and an expert has also just told me that we can sell this land for Rs. 300,000 whereas our balance sheet still shows the land at Rs. 200,000. It should be valued at Rs. 300,000 or at least at Rs. 224,000 (after the effect of 12% inflation)”.

Identify accounting principle(s) (GAAP) applicable to this situation which negates Mr. Ali’s Claim.

Note: You are supposed to mention just name of the relevant accounting Principle(s)


Ans: Cost principle: valuation and recording of assets at cost.

[+ M.Tariq Malik]

THREE GAAP PRINCIPLES THAT contradict with Mr. Ali ‘s claim

The Going-Concern Assumption

This assumption assumes that a business will continue operating and will not close or be sold. It assumes that a business will be in operation for a long time. Based on this assumption, actual costs instead of liquidation values are used for presenting financial information. This assumption is abandoned in the event that a business is actually going out of business.



Cost principle

An asset (something that is owned by the company) is entered into the accounting records at the price paid to acquire it. Because the “worth” of an asset changes over time it would be impossible to accurately record the market value for the assets of a company. The cost concept does recognize that assets generally depreciate in value and so accounting practice removes the depreciation amount from the original cost, shows the value as a net amount, and records the difference as a cost of operations (depreciation expense.)



Realization Principle

The revenue recognition principle requires companies to record revenue when it is realized or realizable and actually earned. In other words, at the time the goods are actually sold or the services are rendered.

When revenue is earned normally has no relationship to when the cash resulting from the earnings is actually received. This principle is the basis for accrual accounting.

[Rao Ali Raza]

dear brother plz chak it if not correct then correct it..............


Ali Raza
Mc090407980
Financial Statement Analysis
GDB

Ans:-

In this question the basically 3 types of the three type of the principles which are as follows…
Cost principle (which is used for the valuation of the land)
Going concern principle (fixed assets are not for resale)
The objectivity Principle (assets are valued verifying)
in this we also include the inflation factor because the price increase due to the infaltin rate..