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Financial Reporting and Disclosure Issues

Please provide 1-2 paragraph for each question plus provide APA references.

I have also included an example for you to understand better for each question:

1. How significant is the cumulative impact of modest inflation rates that accompany normal economic growth on the financial statements of companies that hold long-lived assets?

2. Is historic cost the best model for financial reporting, and if not, what should replace it?

EXAMPLES:

How significant is the cumulative impact of modest inflation rates that accompany normal economic growth on the financial statements of companies that hold long-lived assets?

The cumulative impact of modest inflation rates that accompany normal economic growth can have a significant impact on the financial statements of companies that hold long-lived assets. According to the book, annual inflation of just five percent over fifteen years would result in a doubling of prices, which would cause a currency to lose half its value (Saudegaran & Smith 2013). So if a company left long-lived asset values unchanged over that fifteen-year period, they would show half the actual value on their books. This would affect the stock price for a public company and the sale price for a private company.

Is historic cost the best model for financial reporting, and if not, what should replace it?

The historic cost is not the best model for financial reporting. You cannot accurately compare historical reports to current reports if there has been a change in price level. The two inflation adjusted accounting models that can replace the historical cost are the General Price level Adjusted Model (GPLA) and the Current Cost Adjusted Model (CCA). The GPLA model accounts for general price changes using the Consumer Price Index. The CCA model focuses on the specific price changes of physical assets owned by the firm. It uses the current price for an asset or expense. However, finding the accurate market value for an item can be subjective. For this reason, I think while the GPLA is a basic model that may not accurately reflect asset values, it is still the better model. The added time and resources needed to accurately figure the current value of an item for each new report would be excessive.

Saudagaran, S., & Smith, L. (2013). International accounting: A user perspective (4th ed.).

Solution Preview

QUESTION 1
The cumulative impact of modest inflation rates that accompany normal economic growth on the financial statements of companies that hold long-lived assets may become significant depending on how long the asset's useful life is. An inflation rate of 2% can significantly affect the value of a 30-year ...

Solution Summary

This solution discusses selected financial reporting and disclosure issues in the global context.

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