Multiple Choice
Generally Accepted Accounting Principles (GAAP) require that financial information possess which of the following characteristics?
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15. GAAP vs IFRS
GAAP vs. IFRS: Introduction
Multiple Choice
Under GAAP, U.S. firms must carry most assets at:
A
Replacement cost
B
Historical cost
C
Net realizable value
D
Fair market value
Verified step by step guidance1
Understand the concept of 'Historical Cost' under GAAP: Historical cost refers to the original purchase price of an asset, which is recorded in the accounting books and remains unchanged over time, except for depreciation or impairment adjustments.
Review why GAAP emphasizes historical cost: GAAP prioritizes historical cost because it provides a reliable and verifiable measure of an asset's value, avoiding subjective estimations that could vary over time.
Compare historical cost with other valuation methods: Replacement cost refers to the cost to replace an asset at current prices, net realizable value is the expected selling price minus costs, and fair market value is the price an asset would fetch in an open market. These methods are not commonly used for most assets under GAAP.
Identify exceptions under GAAP: While most assets are carried at historical cost, certain assets like marketable securities or impaired assets may be recorded at fair market value or net realizable value, depending on specific circumstances.
Conclude that under GAAP, U.S. firms must carry most assets at historical cost, as it aligns with the principle of reliability and consistency in financial reporting.
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