7 Conceptual framework: Measurement of items

Question 1

What is historic cost?

Answer 1

Items recorded at the amount of consideration given at the time of acquisition

Question 2

What is current cost?

Answer 2

Items are carried at the value to be pie to acquire the equivalent item currently

Question 3

What is realisable value?

Answer 3

Items are carried at the amount that could be obtained from an orderly disposal

Question 4

What is present value?

Answer 4

Items are carried at the discounted present value of future cash flows relating to the item

Question 5

What are the advantages of financial statements produced using historic cost?

Answer 5

Easy to understand
Objective - free from bias 
Values can be confirmed to original invoice
Straightforward to produce
Gains not recorded into realised

Question 6

What are the disadvantages of financial statements produced using historic cost?

Answer 6

Assets understated
Profits overstated - expenses do not reflect current value of assets consumed/full profit distribution would inhibit future operating ability
Calculation of return in assets is meaningless