Question

The fallout from the financial crisis of 2008 included an overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, which led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers. Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two examples.

Answer 1

A mortgage can be defined as a loan instrument used to raise additional finance from a financial institution or bank .mortgage instrument is secured against the asset to recover the loan amount by liquidating the secured asset.

Answer and Explanation:

The reported accounting numbers might affect an individual's perceptions and actions in the following ways:

• Accounting numbers shall give details regarding the net worth and liabilities of an entity.

• An individual shall perceive the performance of an entity through its accounting figures.

• It is easy to elaborate on the secured and unsecured mortgages of the company through its accounting details.

Example: It is easy to estimate the company's financial health if the company has less liability than its net worth.