4. Financial Reporting-Measurement

7/30/2019 4. Financial Reporting-Measurement

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Financial Reporting:Measurement Issue Define and differentiate accounting and

economic profitExplain the definition, reasons and criticism ofhistorical cost

Explain the definition, reasons and criticism ofcurrent cost

Explain the definition, reasons and criticism ofexit price


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Introduction

The profit measurement is probably the

most important function of financial

accounting. Investors, bankers andothers are interested in knowing how

well the business is doing. (M W E

Glautier,2001)

Profit = measurement of performance ofthe managers in handling the resources

entrusted to their care and use.


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What is profit?

Page 59


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Introduction

The issue is,

how to determ ine the real value of net assets

adopted and repo rtedin the financial

statement.

The cost attached theory

- different perception between economist and

accountants


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Displacement cost

- similar like opportunity cost

Embodied cost

- factor of production concern with

what has been outlaid on input.


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1. Historical Cost

Definition:

original monetary value of an economic

item.Assumptions:

Flow of costs: trace the movement of

cost attached to the goods and services Stewardship: accountable for the

application of assets to operations


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1. Historical Cost: Supports

a. Relevance

b. Verifiable

c. Useful

d. Understandable

e. Objective

f. Insufficient evidence to reject HC


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1. Historical Cost: Criticisms

i. Objectivity of accounting is too narrow

Investors are interested to know

about the original amounts investeddirectly or indirectly by the equity

holders.

ii. Information for decision making

Insufficient to evaluate business

decision


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1. Historical Cost: Criticisms

iii. Basis of historical cost

- Going concern assumption

iv. Matching

- No established concept exists to

ascertain proper matching


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2. Current Cost Accounting

(CCA)Definition:

real time" price.

Assets are valued at current marketbuying price

However, market values are often

unavailable


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2. CCA : Criticism

Subjective determination

Fixed assets value

Irrelevant if the company plan to use theassets

Anticipate profit, never realized

Violates the traditional principles


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3. Exit Price Accounting (EPA)

Definition:

The price that would be received to sell

an asset Valued at the net realizable amount that

the firm would expect to obtain if they

are disposed the assets


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3. EPA: Supports

a. Useful information

accountant should report all profits and losses andvalues as determined in competitive market

b. Relevant and reliable

c. Adaptive decision making

Attempt to adjust to the competitive businessenvironment

d. Additivity

monetary equivalent, result in more meaningful financialstatement


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3. EPA: Supports

e. Allocation free

No cost allocation such as depreciation

f. Reality

g. Objectivity

Exit value is less dispersion ( not so much different)compare if use HC

h. A measure risk

If purchases of respective asset is high (exit price issignificant), the company can reconsider the decision.


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3. EPA: Criticism

a. Profit concept

Does not provide relevant data to match

against revenue

b. Value in use vs value in exchange

Ignores the concept of value in use

c. Additivity


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Class Assignment

Which qualitative characteristics of

financial statement will affect if the

company decides to use whetherhistorical cost and current cost.

4. Financial Reporting-Measurement

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Transcript of 4. Financial Reporting-Measurement