QUESTION 1

Whilst conventional accounting claims objectivity in the preparation of corporate accounts, the way in which a firm values its assets in the balance sheet may be subjectively selected. The traditional approach to valuation was the use of historical cost under which assets were valued in the accounts at the price at which they were purchased. Under Fair-value Accounting (FVA) assets may be valued at the price for which they would be exchanged between knowledgeable and willing parties.

Critically evaluate, in your own words, the advantages and disadvantages of each approach to valuing assets in the corporate balance sheet from the point of view of a prospective investor.