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Tutorial Chapter 5
5.2. Why is accounting measurement potentially controversial?
All measurements in financial reporting are expressed in monetary terms and therefore purport to be measurements of value. However, value can mean different things. A particular asset might be valued at, for example, its historical cost, its replacement cost or its market value. It cannot be said that any one of these measurements is the one and only correct value for the asset. Each value, if the measurement is made properly, will be correct on the basis being used. In their conceptual frameworks, the financial reporting standard-setters refer to the different attributes of assets and liabilities, which give different values when measured. Historical cost, replacement cost and market value are all attributes in this sense. Financial reporting measurement is therefore problematical because the results are affected by the purpose of measurement and double-entry book-keeping can mean that sensible measures of one item in the accounts lead to less sensible measurements of another.
5.4 List some of the critisms that can be made of historical cost accounting when it is applied in times of rising prices?
Historical cost assumes money holds a constant purchasing power. The problem of relevance in times of rising prices is that asset’s current value may be different from historical cost. Moreover, there is problem of additivity (adding together assets bought at different times). Besides, profits can be overstated in times of rising prices, with distribution of profits leading to an erosion of operating capacity. It includes holding gains which accrued in previous periods in current year’s income distorts the current year’s operating results
5.11 Is the summation of assets that are measured using different measurement principles (thereby giving a ‘total assets’ figure) effectively like adding apples and oranges? Explain your answer.
Yes, in my opinion, the summation of assets that are...