Which of the following is the proper method of reporting the value of financial instruments on a firm's balance sheet?
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A. B. C. D. E.D
Company's are required by accounting regulations to record and report the value of financial instruments such as derivatives at cost.
The proper method of reporting the value of financial instruments on a firm's balance sheet depends on the specific accounting standards followed by the company. In this question, we are given multiple options, and we need to select the one that represents the correct method.
Let's go through each option:
A. All of these answers: This answer implies that all the options provided (B, C, D, and E) are correct methods of reporting the value of financial instruments on a firm's balance sheet. However, this is not accurate because only one method can be considered proper. Therefore, option A is incorrect.
B. Higher of cost or market: This method, known as the "lower of cost or market" (LCM) rule, is used to report the value of inventory on the balance sheet. However, it is not typically applied to financial instruments. The LCM rule requires the inventory to be reported at either its historical cost or its market value, whichever is lower. Since the question is specifically asking about financial instruments, option B is incorrect.
C. None of these answers: This option suggests that none of the provided options are correct methods of reporting the value of financial instruments on a firm's balance sheet. While it is possible that none of the given options are correct, it is unlikely that this would be the correct answer, as it does not provide any specific alternative method. Without a proper alternative, financial instruments must still be reported on the balance sheet using a recognized method. Therefore, option C is unlikely to be the correct answer.
D. Cost: The cost method involves reporting financial instruments on the balance sheet at their historical cost or original purchase price. Under this method, the instruments are not revalued to reflect any changes in their market value over time. The cost method is typically used for financial instruments that are not actively traded in liquid markets and do not have readily determinable fair market values. This method is considered conservative and straightforward. Therefore, option D could be a potential correct answer.
E. Fair market value: The fair market value method involves reporting financial instruments on the balance sheet at their current market value. This method requires periodic revaluation of the instruments to reflect changes in market conditions. Fair market value is the price at which a willing buyer and seller would agree to transact in an open market. This method is commonly used for financial instruments that are actively traded in liquid markets and have readily determinable market values. Therefore, option E could also be a potential correct answer.
To summarize, the two options that could be considered proper methods of reporting the value of financial instruments on a firm's balance sheet are:
D. Cost E. Fair market value
Without further context or specific accounting standards mentioned in the question, it is difficult to determine which of these options is the correct answer. It would be advisable to consult the relevant accounting standards or guidelines to determine the appropriate method for a given situation.