Q2-15Q - Intermediate Accounting (Kieso)

Question

The chairman of the company’s board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.

Step-by-Step Solution

Answer

Some of the arguments include precise and accurate costs, frequent revision of ascertainable costs, helpful in comparison of costs with other firms, and the costs of acquiring substitutional amounts that could exceed the benefits obtained.

Meaning of Accounting Data

Accounting data is defined as the information or data included in journals, ledgers, and other reports that aid the accounting statements. This data helps a company track the performance of the business over a given period.

Arguments to convince the chairman that accounting data should be dependent on historical cost

Some of the arguments that can be used are as follows:

• Cost is fixed and accurate, other amounts would have to be ascertained considerably temporarily, and there would be substantial disagreement as to the values to be used.
• Values to be ascertained by different forms are needed to be revised regularly.
• Implementation of historical costs aids to do a comparison with other firms.
• The cost of obtaining the replacement amount may exceed the benefits received.