Inflation & Accounting Flashcards
Historical Cost Accounting
Assets are recorded at original cost (cash/cash equivalents/fair value of consideration). Liabilities are recorded at amount of proceeds in exchange for obligation
Fair Value
amount at which asset/liability can be bought or realized in a current transaction between a willing/knowledgeable buyer
Current Cost
amount the entity would have to pay to replace asset/liability at time of accounts (replacement costs)
Advantages of Historical Cost Accounting
1)Easy to understand
2) Straight forward to produce
3) Objective and free from bias
4) Reliable and original values can be conformed based on documents
5) Do not record gains until recognized
Disadvantages of Historical Costs
1) Carrying value (Book Value)
2) Inventory in BS reflects price at date of purchase rather than current year end
3) Income Statement expenses do not reflect current value of assets consumed so profits is exaggerated
4) Overstatement of profits and under estimates of assets prevent a meaningful ROCE
Advantages of Current Cost Accounting
1) Based on deprival values to business
2) Inventory/NCA are valued at REPLACEMENT COST
3) Monetary assets are not adjusted
4) Assets are stated at their value to the business
5) Holding gains are eliminated from profit
6) Users will be able to assess the current state of business
Disadvantages of Current Cost Accounting
1) Greater subjectivity and lower reliability
2) Lack of familiarity
3) Complexity
4)Only adjust non-monetary value assets
Advantages of FAIR VALUE Accounting
1)Helps provide more accuracy
2) Provides a measurement of true income
3) Historical cost value is always accurate after a long period of time
4) Historical cost of assets remain the same whereas fair values allows for asset reduction
Disadvantages of Fair Value Accoutning
1) Businesses experience frequent fluctuations in values
2) If assets revalued, downward declibes in fair value could trigger sales at a lower price
3) It loses historical perespective
