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 is social exclusion, What is social exclusion? Social Exclusion...

What is social exclusion? Social Exclusion: Social exclusion arises while people are denied access to goods opportunities taken as normal in a society. In several develo

Monopoly union model, Problem 1: (a) In what specific ways does Becker'...

Problem 1: (a) In what specific ways does Becker's model of the allocation of time differ from the simple work-leisure choice model? (b) Compare and contrast the functioning

Mr, using 8 units of production resource to produce 10,000 c0ws by a farmer...

using 8 units of production resource to produce 10,000 c0ws by a farmer how many sheep could he have produced

What are social cohesion-social capital and social inclusion, What are soci...

What are social cohesion, social capital and social inclusion? Development economics importance the role of social capital, cohesion and inclusion into the process of developm

Samantha Hill, Problem-solving question: Use the following data for a firm’...

Problem-solving question: Use the following data for a firm’s output at various levels of employment (L) to calculate: a) its marginal physical product of labor (MPPL) schedule; (

Baumol''s, the basic assumption of the static model

the basic assumption of the static model

What are capacity building policies, What are capacity building policies? ...

What are capacity building policies? Capacity building policies: Capacity building is the development and improvement of institutions. And Capacity building policies as

What is poverty, What is poverty? Poverty is a complicated multidimens...

What is poverty? Poverty is a complicated multidimensional model measured by using a range of indicators. It is about disparities into the distribution of power, opportunity a

Advantages and disadvantages of Pure Monopoly, What is Monopoly and how doe...

What is Monopoly and how does it affect the economic postively and negatively?

Determine the monopoly price and monopoly quantity, 1. A monopolist faces t...

1. A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of 8, with no fixed costs. a) What is the monopoly price? What is the monopoly quantity?

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