The significant difference between market capitalization and book value of companies like Apple Inc. holding sizeable knowledge assets or intellectual capital is an example of
A) the tradeoff between timeliness and accuracy.
B) the tradeoff between relevance and reliability.
C) the tradeoff between cost and fair value reporting.
D) the decreasing emphasis on representational faithfulness.

Question

Quizplus · Accepted Answer

The difference between market capitalization and book value of companies with substantial knowledge assets or intellectual capital illustrates the tradeoff between relevance and reliability in financial reporting. Market capitalization reflects investor perception and expectations about the company's future earnings potential, growth, and risk, while book value represents the historical cost of tangible assets minus liabilities. In cases where a significant proportion of a company's value is derived from intangible assets such as patents, trademarks, copyrights, software, research and development, brand recognition, and human capital, book value may understate its true worth. However, market value may also be subject to volatility, speculation, and distortions. Therefore, accounting standards need to balance the need for relevant information that captures the economic substance of transactions with the need for reliable information that can be objectively verified and audited.

The Significant Difference Between Market Capitalization and Book Value of Companies