Principle Accounting, & Recognition and Measurement Issues

Historical Cost Accounting

Objective of accounting stewardship
Accounting info took a greater significant as
a source info about firms.
Reasonthe corporate form for a large biz
has caused a separation of biz ownership &
control.
Stewardshipemphasis on the contractual
relation between firm & those who provide
resources to it.
Accountability to equity holdersprimary
function
asic !oncept under "!
PROFIT
Paton & Littleton describe profit#
Accounting exists primarily as a means of computing
a residuum, a balance & the difference between costs
& revenue for individual enterprises. The difference
reflects managerial effectiveness & is particular
significance to those who furnish the capital & take
the ultimate responsibility..
ased on Framework for Preparation and
Presentation of Financial tatement#
$. %ncome is increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity& other than those
relating to contributions from equity participants.
'. ()penses are decreases in economic benefits
during the accounting period in the form of
outflows or depletions of assets or incurrences of
liabilities that result in decrease in equity.
O!T! ATTA" T"#OR$
!ost of a product can be determined by
counting the attach costs of goods*services
used in the production of the final products.
Supports the view that accounting is not a
process of valuation but of allocation.
+his concept is used as a fundamental in cost
accounting.
FLO% OF O!T!
Accountant must keep track the flow of costs
until it is e)pired to the %S.
,atching concept is important as accountant
need to decide costs to be considered as
Exit Price Accounting
- %s a system of accounting which uses market selling
prices to measure the firm.s financial position &
performance.
- +he values of non-monetary assets are adjusted to
measure changes in market selling prices specific to
those assets.
- !hanges in the general purchasing power of money
are taken into consideration when measuring financial
positions & results of operations.
!upport for e&it price accounting
$. /rovides useful information to decision oriented
shareholders who are 0outsider. to the firm.
'. ()it values reveal the financial condition of the firm& its
ability to adapt to current environment.
1. /rovide relevant & reliable information to all users.
2. /resent market price is superior compared to other
valuation models for decision making.
3. ()it prices are objective because they are market
determine.
4. All the values in the financial statements are additives
as they are referring to one characteristics.
5. +here is no problem concerning allocation of costs.
6. ()it prices and changes in e)it prices indicators of
financial risks.
riticism of e&it price accounting
o 7oes not provide relevance data to match against
revenues to measure the performance of a firm.
o Accounting must measure past events& those that
actually happened rather than those that might
happen.
o %f the firm was actually contemplating liquidation& the
information of e)it price is relevance& but is not for
most firms.
o !urrent cash equivalent are not additive.
o %t does not recognize the ability of the firm to adapt in
terms of combination of assets.
o %nconsistency in the treatment of bonds as assets &
liabilities and treatment of receivables.
'efense of " Accounting
$."! is relevance in making economic
decisions.
'."! is based on actual& not merely possible
transactions.
1.+hrough history& fin.statements based on
historical costs has been found to be useful.
2.+he best understood concept of profit is the
access of selling price over historical cost.
3.Accountants must guard the integrity of their
data against internal modifications
4.!hanges in market prices can be disclosed
as supplementary data.
5. +here is insufficient evidence to justify
rejection of historical cost accounting.
" is rele(ance in ma)ing economic
decision*
,anagers are concern on future commitments& they
need past data to forecast & measure current
performance with past decision.
I+iri present , reasons-
- %t effects the evaluation & selection of decision rules.
- %t provides input for satisficing notion.
- %t imposed on decision makers by their environment.
" is .ased on actual, not merely possi.le
transactions
A record is based on the actual transaction made.
%jiri point out that or current cost or e)it accounting& it
is possible to prepare the balance sheet on the basis
of year-end market price without reference to actual
transactions.
"! provides evidence for determining how effectively
riticism of " Accounting
Objective of Accounting
%nformation for decision making
asis of "istorical cost
,atching
8otions of investor needs
"istorical cost under attack
Current cost Accounting (CCA)
o %s an accounting system in which assets
are valued at current market buying prices
& profits is determined by allocation based
on current costs
o (dwards & ell 9$:4$; proposed a system
of current cost accounting which is based
on the concept of financial capital
maintenance& but illustrated in other
versions of current cost which use physical
capital maintenance.
Rational of current cost accounting
+he choice of capital concept significantly
affects the derive measure of profit.
!!A is an accounting system in which assets
are valued at current market buying prices &
profits is determined by allocation based on
current costs.
%hy used urrent costs/
o ,anagers want to know how they should
allocate the firm.s resources in order to
ma)imize profits.
o ,anagers make decisions regarding the 1
questions based on the e)pectations about
future events.
o +hey need accurate info to compare if the
e)pectations were inaccurate& current events
should be altered for future benefits.
o %f the info includes events for past events mi)ed
oncept of 0usiness Profit
!olding decisionswhether to 0hold. an assets
& liability to dispose<
"perating decisionshow to use & finance the
entity operations<
o ,i)ing holding gains*losses & operating
gain*losses confuses the evaluation of
management decisions & hinders the
allocation of resources in the economy.
o !!A allows the separation of these
components.
o ,anagement decision to hold assets &
liabilities can be evaluated-benefits to the
appropriate managers for proper decision
making.
0enefits on including holding gain1losses in
Income !tatement
$.!an determine if holding activities are
successful.
'.etter prediction of performance of
management.
1.etter prediction of future cash flow.
2.=ives credit when credit is due.
riticism of urrent cost
!ome mainly from ' different camps#
- +hose who subscribe to "! accounting
- +hose who believe in ()it /rice Accounting
Advocates of historical cost
Advocates of e)it price
In support of current cost
>ecognition principle
Purposes of accounting information
under urrent ost Accounting-
(valuation by managers of their past
decisions in order to make best possible
decisions for the future.
(valuation of managers by shareholders&
creditors & others.
2alue3in3use & 2alue3in3e&change 4Adam
!mith5
- An asset can have ' components.
- ()it price ignore value in use.
- An asset that is held rather than sold must be
worth more to its owners than its e)it prices.
- %t is absurb to record a sound of investment as a
loss simply because the asset has no resale