Principle in Accounting, and Recognition...
DEFENCE OF HISTORICAL COST ACCOUNTING
i. Historical cost is relevant in making economic decisions. * Ijiri present 3 reasons historical cost is relevant for making decision * It effect the evaluation n selection of decision rules. It used the past info to measures the quality of their past decisions. * Provides input for satisficing notion where some managers make decisions that will support expected or satisfactory outcome. They are consider how much has already earned rather than how much mote they can earn. * It is used bcoz it imposed on decision makers by their environment.
Eg: taxation decision n cost plus contract.
ii. Historical cost is based on actual, not merely possible transaction. * Record done based on actual transactions made.
* Ijiri- it possible to prepared a balance she on the basis of year-end market price without references to actual transactions. * Historical cost provides evidences for determining how efficiency management has meet their responsibilities. iii. Through history, FS based on historical cost have been found to be useful. * Mautz – “if whose who make management n investment decision had found financial reports based on historical cost useful over the years, changes in acctg would long since have been mad” iv. The best understood concept of profit is the access of selling price over historical cost. * People understand the basic notion of actual cost compared to the selling price as an access or profit. v. Acctg must guard the integrity of their data against internal modifications. * Historical cost is less subject to manipulation bcoz it is based on actual transaction occurred. vi. How useful is profit information based on current cost or exit price? * Current cost or exit price induce a short term view of profit. * But if the price of an asset at the year end of the year is lower than it was during the year, it will encourages criticism of management by the shareholders for not having disposed of the assets earlier. * The question is the firm not have intention selling asset. vii. Changes in market price can be disclosed as supplementary data. * If the current values are desired by the user, they can refer to the supplementary information. viii. There is insufficient evidence to justify rejection cost acctg. * No persuasive empirical evidence that indicate that current cost or exit price acctg info is more useful than historical cost info. * Most researches study indicate that current cost data do not provide any more info than historical cost data. RATIONAL OF CCA
* The choice of capital concept significantly affects the drive measure of profit. * CCA is an acctg system in which assets are valued at current market buying prices n profits is determined by allocation based on current costs.
HOW OBJECTIVE IS HISTORICAL COST?
* Amount actually paid is more concrete n obj than amount that one would have paid. * Costs in arms length transaction is considered as equivalent to fair value of the item. * The cost of purchased of inventories:
-The cost of conversion
* Incurred in normal course of operation in bringing the inventories to their present location n condition. * Judgment is still needed in determining the acquisition cost of an asset. * Acquisition cost of non current asset what is to be include as part of costs? * Capitalization vs expensing expenditures – Researches n Development Costs. * Estimates have to be made regarding useful life of assets, residual value of future cash flows. * Historical cost is normally combined with other measurement bases resulting in inconsistencies.
OBJECTIVE OF ACCTG
“Corp. reports should rest upon the assumption that a fiduciary mngmntt is reporting to...