Current vs. historical costs, Business Economics

Assignment Help:

Accountants prepare income statements typically in terms of historical costs, in terms of the purchase price, rather than in terms of the current price. The reasons given for this practice are:

1.    Historical costs produce more accurate measurement of the income.

2.    Historical costs are less debatable and more objective than the calculated present replacement value, and

3.    Accountants' job is to record historical costs whether or not they may have relevance for further decision making. The accountants approach ignores certain important changes in earning and losses of the firms, (1) the value of assets presented in the books of accounts is understand in times of inflation and overstated at the time of the deflection, depreciation is understand during deflection. Historical cost recording does not reflect such changes in values of assets and profits. This problem assumes a critical importance in case of the inventories and stock. The problem is how to evaluate the inventory and the goods in the pipeline. There are three common techniques of inventory valuation: (1) first in first out (FIFO), (2) last in first out (LIFO), and (3) weighted average cost (WAC). Under FIFO method, material is taken out of the stock for further processing in the order in which they are acquired. The stocks, therefore appear in the firms balance sheet at their actual cost price. This method is suitable when price has a secular trend. However, this system exaggerates profits at the time of rising prices. The LIFO method assumes that stocks purchased most recently become the costs of the raw material in the current production. If inventory levels are stable the cost of the raw materials used at any point in the calculation of profits is always close to market or replacement value. But when inventory levels fluctuate this method loses its advantages. The WAC method takes the weighted average of the costs of materials purchased at different prices and different points of time to evaluate the inventory. All these methods have their own weaknesses and do not reflect the true profit of business. So the problem of evaluating inventories so as to yield a true profit figure remains there.


Related Discussions:- Current vs. historical costs

Estimate the total opportunity cost, In the absence of taxes, subsidies or ...

In the absence of taxes, subsidies or other distortions, the market demand and supply for bags of cement would be given by Q D = 1500 - 10P and Q S = 140P, respectively, where Q

What is capital accumulation, What is capital accumulation? Capital ac...

What is capital accumulation? Capital accumulation simply implies an increase into a country is stock or amount of capital over time. It requires net investment, which is inve

Price elasticity of demand, explain why each of the following factors influ...

explain why each of the following factors influence the own price elasticity of demand for a comodity 1. Consumer preferences 2. the narrowness of definiton of the commodity

How to describe business purpose- mission- strategy, I. Describe your compa...

I. Describe your company Relevant history Resources, strengths, weaknesses Purpose, mission (what does your company do for whom) Company brand / position: what m

How is the informal sector, How is the informal sector, urban modern sector...

How is the informal sector, urban modern sectors connected? Several urban regions into developing countries are dualistic as: current formal activity exists side by side along

GDP, GDp of World?

GDp of World?

Why is world bank worked jointly with IMF, Why is World Bank worked jointly...

Why is World Bank worked jointly with the International Monetary Fund? The WB works jointly along with the IMF to assist LDCs through coordinated: a. Structural Adjustment P

Expenditure, why do businesses have to sped money (expenditure)in order to ...

why do businesses have to sped money (expenditure)in order to succeed?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd