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ACCT 001 Lecture Notes - Lecture 19: Historical Cost, European Cooperation In Science And Technology, Corporations Act 2001

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pearjellyfish736
23 Dec 2020
School
College of The Sequoias
Department
Accounting (ACCT)
Course
ACCT 001
Professor
skaff

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Document Summary

Five basic methods for measuring (valuing) assets and liabilities. Current or market value (value in exchange) The ability to document the cost of the asset is a major reasons why historical cost is the usual valuation method for most assets and liabilities. Another reason is that an enterprise will rarely purchase assets for more than the enterprise believes them to be worth. Under this method, an asset is valued at its expected lowest or most conservative value of future benefits at the date of acquisition. At point of acquisition, historical cost = market value = value in use (present value) in most cases. Criticism linked to time issues; whether an asset has increased in value over time or decreased. If an asset"s market value later falls below its original cost, the asset may be written down to the market value: price-level-adjusted historical cost.

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Related Questions

You are a controller at a company that uses various valuation bases. The newly hired CEO does not have an accounting background and wants to understand the company’s various valuation bases used in GAAP. She has requested that you write a memo to her discussing the various valuation bases used in U.S. GAAP including historical cost, fair market value, liquidation value, replacement value, and depreciated or amortized cost.

Also include in your discussion when is it appropriate to use these different valuations. For each basis in your memo include the basis definition, describe in general terms when it is proper to use the basis, then critique the advantages and disadvantages of it its use.

please answer the whole question.

Keeping an asset implies reinvestment in the asset. Finance theory is consistent with the notion that reinvestment is at current value, or replacement cost. Such a decision is presumably based on comparing expected future cash flows that will be generated by the asset and the cost of replacing it with a new one that could generate the same or different cash flows. According to the conceptual framework, the purpose of financial statements is to provide information regarding performance. Investment or reinvestment decisions are a part of that performance. Yet, the historical cost of fixed assets is retained and allocated over subsequent accounting periods.

b. Does cost allocation provide relevant information?

c. Would a current?value approach to measurement of fixed assets be preferable? Why?

Keeping an asset implies reinvestment in the asset. Finance theory is consistent with the notion that reinvestment is at current value, or replacement cost. Such a decision is presumably based on comparing expected future cash flows that will be generated by the asset and the cost of replacing it with a new one that could generate the same or different cash flows. According to the conceptual framework, the purpose of financial statements is to provide information regarding performance. Investment or reinvestment decisions are a part of that performance. Yet, the historical cost of fixed assets is retained and allocated over subsequent accounting periods. Required: a. Present arguments in favor of cost allocation.