Historical cost can be defined as the original cost of an asset during transaction and recorded in an organization’s accounting record. Generally Accepted Accounting Principles stated that assets and liabilities must be recorded in balance sheet with original cost which is the purchasing cost during that time. The historical cost accounting often used in the condition where prices are constant or change slowly and yet, it does not affect the purchasing power of an item. There is no doubt on balance sheet amount because of the historical cost represented how many amount has been paid or received during the actual transactions. The advantages and disadvantages of historical cost accounting are discussed as below:
One of the advantages of historical
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Net realizable value is an exist value, an estimate of the amount an asset could be sold for in its present condition minus disposal costs. Current cost is an input or entry value, an estimate of the amount that would have to be paid currently to acquire the future economic benefits of an asset in the normal course of business (Hoggett & Edwards, 1996, p. 669). The advantages and disadvantages current value accounting are discussed as below:
One of the advantages of current value accounting is relevant for making decisions. This is because the market value of the current value accounting represents the current cost of economic transactions. Therefore, the information that provide are more appropriate and more useful because it always update to the latest information in market. It is better to use the latest information to make decisions rather than using previous information for measurement.
On the other hand, current value accounting provides an efficiency measurement. This is because the profit of the good or services will be separated and recorded as the business’s asset before it sold. The separation of business gain and business asset must be done to make sure the accuracy of calculation for a
Over the past several years, there has been a growing controversy over the accounting issues of fair values and historical cost. The basis of this controversy revolves around which one of these principles is the most accurate. There are many different viewpoints on this issue. Many accounting professionals believe that fair value is just as accurate as the historical cost principle, while others believe that the historical cost is more reliable. The facts about each of these valuation methods will be researched and explained throughout this research document, as well as the different viewpoint about which method is the most accurate and reliable.
Property, plant and equipment are the major source of future service potential to companies. The major objectives of property, plant and equipment accounting is to provide information about companies’ stewardship, accounting for the use and deterioration of property, plant and equipment, plan for project costing and budgeting, provide information for tax authorities, and provide rate-making information for regulated industries (Schroeder, Clark & Cathey, 2010). To help determine how effective and efficient companies utilize their property, plant and equipment, the asset utilization ratios are being calculated. Asset utilization ratio is a measure that determines whether the company is efficiently utilizing its assets to generate income or just wasting it (Hartman, 2015).
This text is still relevant to business today because it had the most basic processes for accounting some that are still used today; it is very outdated but nonetheless still quite useful
Financial reporting is extremely important in our everyday life. You have heard of the many
In the past, historical cost measures were mainly used for reporting as they are reliable. However, historical cost is only relevant upon acquiring the asset and becomes irrelevant as time passes. On the other hand, fair value-based reporting, which accounts for changes in fair values, can produce balance sheet figures that provide a better reflection of the company’s value. This is also why accounting bodies are moving towards fair value accounting (FVA).
(BESSONG, 2012) Study the importance of historical value and fair value cost accounting on reported profit. The study discussed how fair value accounting and historical cost accounting will have effect on the reported profit. However it is said that key objective of any business is to earn profit and it is also equally important to report the profit. Especially it is more important to record profit carefully during inflationary period. However they have study the reported profit and effects of fair and historical value by collecting data from both primary and secondary source. Therefore it is found that historical and fair value both is equally important and both have significant effect on the reported profit. Therefore operating profit of the company is influenced by the amount that is paid for taxes, dividend and depreciation.
Along with active capital market and the rapid development of science and technology, the fair value measurement will increasingly shows its rationality and necessity, is bound to further enhance and improve the quality of accounting information system.
The following report is presented in order to show that there is a specific stimulus for the selection of a particular accounting policy or method from a range of its alternatives. In the report, one of the most successful companies of Australia, i.e. Woolworths Limited (Woolworthslimited.com.au, 2015) is chosen and all the requirements of the report are fulfilled keeping this company in mind. The particular area with which the accounting policies relate is tangible fixed asset, and its valuation. For clarity and understanding point of view, the actual examples from the financial statements in the published annual reports of the company in the past
A company can use the present value concept to determine the value of a property today that is expected to earn the minimum of the projected future cash flow or the amount of money that needs to be invested today to reach a desired future sum. Investors who are interested in acquiring businesses would use the present value of money concept.
Cost volume profit (CVP) analysis and costing for the 21st century has evolved into a very complex and difficult paradigm. Even the most gifted accountants find that grasping the entire concept of accounting for a corporation can be very mind-boggling and difficult. Yet, understanding such a fundamental principle can allow corporations to grow in ways that other, less educated, corporations can never dream to achieve and simultaneously understand the ‘bottom-line’. In this paper we will discuss value costing in the 21st century, other relevant costing methods, and the relevancy of CVP in today’s workplace.
This Vortec case study is about the importance of accounting number and how they used in decision making and control. In this case study the Vortec manufactures a single product, a medical probe and distribute them in the market. The Vortec has two divisions, a manufacturing division which produces the probe and a marketing division which sells the probe. The reward system for both the divisions are different, for the manufacturing division the reward is based on the average unit cost of making the probes and for the marketing division the reward is based on sales revenues. Here the manufacturing division wants to decrease the average unit cost and the marketing division wants to increase the sales revenue, furthermore we need to consider the owners of the Vortec, they want maximize profit. Each of these groups have different interests and when the Vortec makes a decision, they must align all these interests.
Continued use of current (fair) values is consistent with FASB’s and the IASB’s conceptual preference for the primacy of the balance sheet over the income statement. Fair value represents measurements related to the present. Historical cost represents measurements relating to the past. Current GAAP requirements for fair value measurement of select assets and liabilities hark back to the banking and Savings & Loan crisis of the 1980s. At that time, many financial institutions were paying higher interest on deposits than they were earning on long-term fixed-rate mortgage loans. The historical cost model, the prevailing measurement attribute under GAAP at that time, masked the problem by recognizing losses gradually through negative net interest income. The current value of the institutions’ assets was less than the current value of the liabilities, effectively making the institutions insolvent. The historical cost model obscured the problem due to the requirement of carrying assets at inflated cost figures. Therefore, transparency was greatly diminished. Existing fair value and mark-to-market requirements were developed over several decades to address specific market events or conditions as noted above. These standards were the result of an extensive due process, and their
Fair value accounting utilising market value as a benchmark to value company’s assets has drawn a lot of controversy.
Compare with revaluation method, history cost method will decline the comparability of the market. As we all know, from the 21 century, network, communication, and transportation were enhanced very quickly, so globalization of markets has a huge scale and international trade is highly common for all the country. Therefore accounting is more important for a cooperative or competitive partner. Meeks and Swann (2009) believe that the various accounting report will hinder the progress of international trade. When the company will use history cost to record the fixed assets, the initial value and regular deprecation are written in the financial statement. Accounting to Ying and Kan (1996), due to the development of technology, scarcity of labor and price changes, the historical cost method cannot reflect the real assets. However, the revalued method is used fair value which can show the real price of assets, and Lihong, Yun, Yunying (2010) state that if the fair value used in the accounting, the profit will more approach the profit of economy. What is more, as reported by Ionascu (2012); Mane (2013) that uses fair value in revaluation method is unreliability and it violates the principle of prudence. Thus revaluation method can exhibition the fair value of property, plant, and equipment.
Cost accounting is a type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance (Cost Accounting, n.d.).