What Is the Main Problem in Using a Balance Sheet

question 97

Multiple Choice

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?

• A)The balance sheet does not accurately represent the book value of assets held by the company.
• B)The equity shown on the balance sheet does not reflect the market capitalisation of the company.
• C)Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
• D)Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

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Definitions:

Projected Benefit Obligation

Represents an estimate of the total amount to be paid to participants in a defined benefit pension plan, based on employees' service and salary history.

Prior Service Cost

The cost associated with retroactive benefits granted in a pension plan amendment, recognized over the service lives of affected employees.

Plan Assets

Assets that are specifically earmarked to pay pension benefits, typically held in a pension fund.

Pension Expense

An accounting charge representing the cost to a company of providing retirement benefits to employees during a particular time period.