Applications of mark to market accounting The most basic application of the method of mark to market accounting is in the work of stock traders. The stocks of a firm are valued at the end of every trading day based on their closing market rates on the day. The income statement that is generated automatically tracks any net increase or decrease in the value of the securities as compared to the previous day which has a direct impact on the firm’s retained earnings. Another application of mark-to-market accounting Is evaluation of a Mayans debts based on the current market prices.
A fall In the firm’s debt due to any reason may decrease Its value on the balance sheet and show higher retained earnings. On the other hand, a rise In the debts may portray a loss In the Income statement and lead to reduction of retained earnings. The application of mark to market accounting with regards to the value of securities and public trading debts is more effective when trading in the more liquid stock markets such as nationalized stock exchanges. Advantages of Mark to Market accounting
Experts consider this method as a tool that helps in getting a true picture of the financial situation of a firm as compared to historical cost accounting. ; The mark to market method has also made financial services firms more disciplined, which is not the case with bull and bear markets. ; It is considered to be a mechanism that can correct Itself. ; Mark to market accounting can help In reducing the company’s risk In the time of market decline. ; Applying mark to market accounting during a rise In arrest can allow a firm to Increase Its leverage.
Disadvantages of Mark to Market accounting Mark to Market accounting is considered to be one of the chief causes of the financial crisis that occurred in 2008. ;A reduction in the value of the securities or stocks of firms decreased based on mark to market accounting and had an adverse effect on their credit rating thereby reducing borrowing capacity and driving them towards insolvency. Reference: http://classify . Com/homework-help/cost-accounting-homework-help/
By Classify method of assessing the value of an asset or liability to showcase its actual market value rather than its initial cost. In financial organizations, the mark-to-market value is determined by finding out the price of the financial instrument in public trading earnings. Another application of mark-to-market accounting is evaluation of a company’s debts based on the current market prices. A fall in the firm’s debt due to any reason may decrease its value on the balance sheet and show higher retained earnings.