Measurement of Historical Cost Accounting
Introduction
Fundamental basis for measuring, recording and reporting the economic and related activities of an entity.
The Objective of Accounting
Criticism of historical cost accounting with no recognition of the charging value.
Accounting information took on greater significance as a source of information about firms.
A fiduciary management is reporting to absentee investors.
The owners are suppliers of funds. The assets and income are the enterprise, not the shareholders.
Cost Attach Theory
Displacement cost
Embodied cost
What has been given up or sacrificed.
The factors of production and has to do with what has been outlaid on inputs.
Criticism
Flows of chat
When the lower of cost or market method is used for inventory, this denies that costs attach.
Defence of The Historical Cost
Historical cost is relevant in making economic decision.
Historical cost is based on actual, not merely possible, transactions
Financial statements are based on historical cost.
The best understood concept of profit is the excess of selling price over historical cost.
Evidence on Usefulness of Accounting Data
Evidence on Predictive Value
Income
A measure of the performance of the managers in handling the resources entrusted to their care and use.
Also known as opportunity cost.
Accountants must keep track of the flow of costs for costs attach purposes.
Accountants must decide which costs have ‘expired’ and therefore are to be matched.
Cost allocation is at the heart of conventional accounting.
Second Direction
- Discovering if accounting data are useful, to determine their effect on people’s decision making
Third Direction
- earnings rather than book value to explain market value and the change in earnings rather than earnings to explain security returns
First Direction
- To focus on financial statements, determine whether sufficient information is disclosed
Changes in market prices can be disclosed as supplementary data.
Past earnings used to predict future earnings
Predicting financial distress
Predicting future cash flows
Used to predict annual income
Quarterly and segment data used to predict annual income
Criticsms of The Historical Cost of Accounting
Objectives of accounting
Basic of historical cost
Notions of investors needs
Matching
Infiirmation for decision making