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How Much Financial Information is in the Historical Cost and Market Valued Balance Sheets?


  • Kropp, Jaclyn D.
  • Moss, Charles B.


Financial accounting has emphasized the historical cost approach because of its objectivity. Yet in the event of bankruptcy and liquidation, assets will be liquidated at their market values. In this paper, we compare the probability of insolvency computed using market values to the probability of insolvency computed using historical costs. We find that the historical value based computation has the potential to both understand and overstate the true probability of insolvency. The disparity between the historical value based computation and the market value based computations depends on the degree of leverage and the age of the assets.

Suggested Citation

  • Kropp, Jaclyn D. & Moss, Charles B., 2013. "How Much Financial Information is in the Historical Cost and Market Valued Balance Sheets?," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 143077, Southern Agricultural Economics Association.
  • Handle: RePEc:ags:saea13:143077

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    References listed on IDEAS

    1. Gal Hochman & Scott Kaplan & Deepak Rajagopal & David Zilberman, 2012. "Biofuel and Food-Commodity Prices," Agriculture, MDPI, Open Access Journal, vol. 2(3), pages 1-10, September.
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    3. David Zilberman & Gal Hochman & Deepak Rajagopal & Steve Sexton & Govinda Timilsina, 2013. "The Impact of Biofuels on Commodity Food Prices: Assessment of Findings," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 275-281.
    4. McPhail, Lihong Lu & Du, Xiaodong & Muhammad, Andrew, 2012. "Disentangling Corn Price Volatility: The Role of Global Demand, Speculation, and Energy," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(03), August.
    5. Stefan Busse & Bernhard Brümmer & Rico Ihle, 2012. "Price formation in the German biodiesel supply chain: a Markov-switching vector error-correction modeling approach," Agricultural Economics, International Association of Agricultural Economists, vol. 43(5), pages 545-560, September.
    6. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective," Energy Economics, Elsevier, vol. 34(5), pages 1380-1391.
    7. McPhail, Lihong Lu, 2011. "Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach," Energy Economics, Elsevier, vol. 33(6), pages 1177-1185.
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    More about this item


    depreciation; historical value; loan evaluation; market value; solvency; Agribusiness; Agricultural Finance; Financial Economics; G33; Q14;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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