Post on 14-Apr-2018
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Financial Reporting:Measurement Issue Define and differentiate accounting and
economic profitExplain the definition, reasons and criticism ofhistorical cost
Explain the definition, reasons and criticism ofcurrent cost
Explain the definition, reasons and criticism ofexit price
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Introduction
The profit measurement is probably the
most important function of financial
accounting. Investors, bankers andothers are interested in knowing how
well the business is doing. (M W E
Glautier,2001)
Profit = measurement of performance ofthe managers in handling the resources
entrusted to their care and use.
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What is profit?
Page 59
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Introduction
The issue is,
how to determ ine the real value of net assets
adopted and repo rtedin the financial
statement.
The cost attached theory
- different perception between economist and
accountants
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Displacement cost
- similar like opportunity cost
Embodied cost
- factor of production concern with
what has been outlaid on input.
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1. Historical Cost
Definition:
original monetary value of an economic
item.Assumptions:
Flow of costs: trace the movement of
cost attached to the goods and services Stewardship: accountable for the
application of assets to operations
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1. Historical Cost: Supports
a. Relevance
b. Verifiable
c. Useful
d. Understandable
e. Objective
f. Insufficient evidence to reject HC
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1. Historical Cost: Criticisms
i. Objectivity of accounting is too narrow
Investors are interested to know
about the original amounts investeddirectly or indirectly by the equity
holders.
ii. Information for decision making
Insufficient to evaluate business
decision
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1. Historical Cost: Criticisms
iii. Basis of historical cost
- Going concern assumption
iv. Matching
- No established concept exists to
ascertain proper matching
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2. Current Cost Accounting
(CCA)Definition:
real time" price.
Assets are valued at current marketbuying price
However, market values are often
unavailable
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2. CCA : Criticism
Subjective determination
Fixed assets value
Irrelevant if the company plan to use theassets
Anticipate profit, never realized
Violates the traditional principles
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3. Exit Price Accounting (EPA)
Definition:
The price that would be received to sell
an asset Valued at the net realizable amount that
the firm would expect to obtain if they
are disposed the assets
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3. EPA: Supports
a. Useful information
accountant should report all profits and losses andvalues as determined in competitive market
b. Relevant and reliable
c. Adaptive decision making
Attempt to adjust to the competitive businessenvironment
d. Additivity
monetary equivalent, result in more meaningful financialstatement
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3. EPA: Supports
e. Allocation free
No cost allocation such as depreciation
f. Reality
g. Objectivity
Exit value is less dispersion ( not so much different)compare if use HC
h. A measure risk
If purchases of respective asset is high (exit price issignificant), the company can reconsider the decision.
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3. EPA: Criticism
a. Profit concept
Does not provide relevant data to match
against revenue
b. Value in use vs value in exchange
Ignores the concept of value in use
c. Additivity
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Class Assignment
Which qualitative characteristics of
financial statement will affect if the
company decides to use whetherhistorical cost and current cost.