#cfa-level-1 #reading-23-financial-reporting-mechanics
Valuation adjustments are made to a company’s assets or liabilities—only where required by accounting standards—so that the accounting records reflect the current market value rather than the historical cost.
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In contrast to accrual entries that allocate revenue and expenses into the appropriate accounting periods, valuation adjustments are made to a company’s assets or liabilities—only where required by accounting standards—so that the accounting records reflect the current market value rather than the historical cost. In this discussion, we focus on valuation adjustments to assets. For example, in the IAL illustration, Transaction 13 adjusted the value of the company’s investment portfolio to its curOriginal toplevel document
Open itved and the corresponding liability to deliver newsletters) and, subsequently, 12 future adjusting entries, the first one of which was illustrated as Transaction 12. Each adjusting entry reduces the liability and records revenue.
<span>In practice, a large amount of unearned revenue may cause some concern about a company’s ability to deliver on this future commitment. Conversely, a positive aspect is that increases in unearned revenue are an indicator of future revenues. For example, a large liability on the balance sheet of an airline relates to cash received for future airline travel. Revenue will be recognized as the travel occurs, so an increase in this liability is an indicator of future increases in revenue.
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