Cost and Value for Assets and Depreciation; Unearned Revenue
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1. Why is it better to refer to the costs, rather than values, of assets such as plant or inventories?
2. Depreciation is cost allocation, not valuation? Is this correct? Why or why not?
3. What types of companies would you expect to have unearned revenues (or deferred revenues) on their balance sheets?
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The 448 word solution presents a good discussion of the concepts together with examples as appropriate.
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1. Why is it better to refer to the costs, rather than values, of assets such as plant or inventories?
Normally, the cost basis is what is presented in financial statements and much of the discussion and analysis of company assets relate to the financial statements. Because inventory is a current asset, it normally turns over several times a year. For current assets, there would generally be very little difference between fair market value and cost basis.
For plant, property and equipment (and other long term assets), there could be a huge difference between cost and value. One of the basic assumptions of GAAP accounting is that assets should be presented at cost ...
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