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

What are rostowís policy implications, What are Rostowís policy implication...

What are Rostowís policy implications? • LDCs (Less Developed Countries) require aid. The development procedure can stall at the Take Off stage for be short of savings. 15

Price Discrimination, Suppose a monopolist produces at constant marginal co...

Suppose a monopolist produces at constant marginal cost and is able to discriminate between two groups of consumers. The demand in each group is linear. Would the monopolist discri

Who will sell and buy permits, There are three industrial firms in a quaint...

There are three industrial firms in a quaint town of South Orange where the municipal government wants to reduce pollution to 120 units from uncontrolled level of 210 units. Three

Calculate average total cost, Calculate Average Total Cost A perfectly ...

Calculate Average Total Cost A perfectly Competitive firm is operating at a profit-maximizing level of output, q*. This output level is 500 units. At this output level, the

What are the assumptions of dependency theory, What are the assumptions of ...

What are the assumptions of dependency theory? The assumptions of dependency theory: Dependency theory extends Marx is theory of surplus value to international relationship

Business Math, Scenario: A client comes to you for investment advice on his...

Scenario: A client comes to you for investment advice on his $500,000 winnings from the lottery. He has been offered the following options by three different financial institutions

Is ownership of change important for development, Is ownership of change im...

Is ownership of change important for development? Successful polices depend onto countries owning the process. When the economic reforms required for development are considere

What are the factors of evaluating a policy or institution, What are the fa...

What are the factors of evaluating a policy or institution? Factors to consider during evaluating a policy or institution comprise: • Internal and external constraints onto

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