In each of the following independent situations, an example is given requiring a trade-off between the qualitative characteristics discussed in the text. For each situation, identify the relevant characteristics and briefly discuss how satisfying one characteristic may involve not satisfying another.
1. The book value of an office building is approaching its originally estimated salvage value of $200,000. However, its current market value has been estimated at $20 million. The company’s management would like to disclose to financial statement users the current value of the building on the balance sheet.
2. MMM Industries has used the FIFO inventory method for the past 20 years. However, all other major competitors use the LIFO method of accounting for inventories. MMM is contemplating a switch from FIFO to LIFO.
3. Stocks Inc. is negotiating with a major bank for a significant loan. The bank has asked that a set of financial statements be provided as quickly after the year-end as possible. Because invoices from many of the company’s suppliers are mailed several weeks after inventory is received, Stocks Inc. is considering estimating the amounts associated with those liabilities to be able to prepare its financial statements more quickly.
4. Satellite Inc. produces and sells satellites to government and private industries. The company provides a warranty guaranteeing the performance of the satellites. A recent space launch placed one of its satellites in orbit, and several malfunctions have occurred. At year-end, Satellite Inc.’s auditors would like the company to disclose the potential liability in the notes to the financial statements. Officers of Satellite Inc. believe that the satellite can be repaired in orbit and that disclosure of a contingency such as this would unnecessarily bias the financial statements.

  • CreatedApril 07, 2012
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