Questions and responses to the subject of financial statements Essay

Fiscal statements contain fiscal information about a concern organisation that should be just and accurate. They should state determination shapers about the company ‘s fiscal personal businesss. In peculiar, fiscal statements are of import for investors and creditors in their efforts to measure future hard currency flows from the company to them. However, as Elliott and Elliott, 2008 province, there has been an increasing concern about the impact of traveling monetary value degrees on net income and capital measuring. Therefore, “ Historical Cost Accounting ( HCA ) is the worst possible accounting convention, until one considers the options ” ( p.86 ) . Hence, there are alternate accounting attacks that have been proposed to integrate these motions into the fiscal studies. Notwithstanding, these attacks are still undergoing development and have non achieved general support among practicians in the accounting field.

You are required to discourse and notice on the above statement with mention to academic books, documents, and other published beginnings that you have read. See all the following in your response:

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Critically evaluate fiscal statements in footings of its importance, dependability and relevance to the cardinal users.


As stated by Atrill & A ; McLaney, the fiscal statements aim is to supply a snapshot of the fiscal place and public presentation of a concern ( Atrill & A ; McLaney, 2008 ) .

The Financial Accounts of a company describe the public presentation of the company in fiscal footings. They are drumhead of the extended activities of a concern designed to supply true and accurate images to stakeholders ( Woelfel, 1994 ) .

In today ‘s universe, the fiscal histories of a company will be of involvement to broad assortment of users called stakeholders ( DL MBA Material, 2003 ) .

As discussed in DL MBA stuff, some of stakeholder of a company can be proprietors, loaners, investing analysts, directors, employees, clients, providers, rivals and authorities bureaus. The following briefly discuss features of fiscal studies which would be interested to each party ( DL MBA Material, 2003 ) .

Owners – The stockholders of company ‘s are ultimate proprietors. The stockholders invest their money into company & A ; hence they are concern with profitableness, dividend and future chances of the company. Their chief concern is dependability of information available to them to make up one’s mind their future outlooks or class of actions ( DL MBA Material, 2003 ) .

Lenders – They are the fiscal establishments who lend money to a company for its regular operation or concern enlargements. They perform elaborate analysis of company histories and do determination to impart money. It helps them to understand the fiscal purchase of the company by analyzing the different purchase ratios like debt-to-equity ratio etc. They determine the fixed assets of the company in order to cover up any contingency. They decide the repayment ability of companies towards adoptions ( DL MBA Material, 2003 ) .

Investing Analyst – They are risk-appetite bargainers, single investors, and fiscal establishment looking for concern chance to put money into a company. They frequently use company ‘s history to measure the hereafter growing and profitableness of a concern. One of their chief concerns is growing potency of the company & A ; their portion monetary value public presentation in stock market ( DL MBA Material, 2003 ) .

Directors – A companies directors ‘ purpose is to analyze the fiscal accounting and happen the way of the attempts being put to accomplish corporate aims. They normally determine the company public presentation based on thorough internal histories. Their single public presentations get judged by the bring forthing good accounting figures ( DL MBA Material, 2003 ) .

Employee – They would be concern about hereafter of company & A ; stableness and would be looking at histories from company profitableness, growing, long term concern and truthfulness of information ( DL MBA Material, 2003 ) .

Customers- They frequently sees company ‘s history to find the strength of the possible seller to fulfill their committednesss ( DL MBA Material, 2003 ) .

Supplier- They frequently sees company ‘s histories to find the recognition installations & A ; payment footings ( DL MBA Material, 2003 ) .

Competitor- will be interested to see the histories to derive any advantage which they can do usage of ( DL MBA Material, 2003 ) .

Government agencies- Tax authorization will take closer expression into a company ‘s history to place any disagreement in the history by exaggerating or under standing net incomes. Hence the cardinal standards would be to look into truth, verifiability & A ; truthfulness ( DL MBA Material, 2003 ) .

The different users of histories got different motivation to look at it and they got different demand like equity, truthfulness, public presentation, refund capacity, fiscal purchase, liquidness and hard currency flow of a company.

Question 2: Review the defects of HCA theoretical account when monetary values are lifting and explicate why fiscal studies under the HCA are capable to some major restrictions ( e.g. stock list is undervalued, the depreciation charge to the income statement is unostentatious, balance sheet values are understated, and periodic comparings are invalidated ) .


The historical cost accounting is a convention in which plus values are based on the existent sum paid for the assets with no rising prices accommodations. The historical cost conventions reference that the value of assets should be accounted on their acquisition cost ( Atrill & A ; McLaney, 2008 ) .

It does non take into history rising prices though there are certain accommodations like depreciation, depletion and damages (, 2010 ) . It relies on an premise that the buying power of money is changeless through out and does non alter with clip. Under historical cost attack, the stock lists are reported in balance sheet at cost. However, there may be decrease in realisable value of the stock lists due to obsolescence, impairment or salable monetary value alterations ; therefore historical cost attack does non account for this alteration ( Hawawini & A ; Viallet 2007 ) .

It is frequently said that the weighing assets at their current value would supply a more true image of the fiscal place of a company and would be more meaningful to broad scope of audiences for determination devising. But at the same clip it has got dependability job ( Atrill & A ; McLaney, 2008 ) .

With rise in monetary value, HCA will non be able to capture the alteration in rating of underlying assets as it records the value of assets as historical cost. Hence, addition in the value of assets will non be reflected in a company balance sheet. Due to this the balance sheet will non show the true fiscal place. As a consequence, in the clip of high rising prices, net incomes will be overstated and revenue enhancement liability will increase.

Again with monetary value autumn, similar job will be observed but this clip existent plus value will be less than the historical cost hence exaggerating the assets on the balance sheet & A ; sabotaging the net incomes & A ; the revenue enhancement liability will diminish.

The depreciation adds more complication to the job. The cost of assets by and large spread out over a figure of old ages of its usability life clip at the monetary value paid at the executing of a dealing. The depreciation affects the transporting value of the plus. HCA does non see the existent value and therefore deprecating original value does non demo true image.

Question 3: Why has the HCA theoretical account survived in malice of its restrictions in times of rising prices?


The HCA theoretical account is traditional accounting theoretical account and there are many grounds for its endurances. It is straightforward, simple and dependable. There are certain restriction with net market value, depreciation, monetary value rise & A ; autumn and rising pricess but at the same clip other accounting systems mostly faces concerns around dependability, rightness, quality & A ; truthfulness of information ( Johnson, 2005 ) .

As per Johnson, the historical costs though non just but much more dependable. Hence many cases, the importance is given to tradeoff between historical costing and other advanced just value patterns in much larger position ( Johnson, 2005 ) .

The foundation of HCA is a existent dealing which has happened and the money has been paid for that dealing. Hence the cost value is a existent & A ; non fabricated and has its root in that dealing. It is non about ciphering slightly fanciful or conjectural cost. The chief advantage of utilizing historical cost accounting is simplicity and certainty. The other advantage is it gives directors ability to calculate future operational costs. Hence in malice, many experts argue that the equity of the method is far from existent value, it still continue to rule the accounting universe.

Question 4: Discourse the characteristics of current income and value theoretical accounts ( e.g. Current Buying Power Accounting ( CPPA ) and Replacement Cost Accounting ( RCA ) theoretical accounts ) that have been suggested to replace or run in tandem with the HCA convention.


As per Nobes, current buying power or general buying power accounting systems are based on historical cost histories adjusted with general monetary value index Numberss ( Nobes, 1992 ) . In instance of current buying power accounting, the original buying costs are corrected by rectification factor based on some general index like retail monetary value index. The corrected purchase cost is so used to cipher the balance value of the assets in order to record in the balance sheet for that twelvemonth. Hence it represents more realistic value for non-monetary assets.

Ahmed argues that the replacing cost accounting steps replacement cost in units of money. He argues that the replacing cost income is equal to the difference between realised grosss and their corresponding replacing costs in units of general buying power ( Riahi-Belkaoui, 1996 ) . As per Drummon & A ; stickler, the replacing cost is the sum of hard currency or hard currency equivalent that would be needed soon to get tantamount assets which can supply same map as the original plus. The method consists of gauging the cost of a new plus as argued by Christina ( Drummon & A ; stickler, 1983 ) . The of import feature of replacing cost accounting is to capture the effects of altering monetary values and ultimate altering value of the points.

The cardinal characteristic of both techniques is to capture the loss or addition in the value of non-monetary points such that the effects of rising prices or deflation can be captured in the balance sheet to do it more accurate.

Question 5: Critically measure the virtuousnesss and defects of these alternate theoretical accounts.


The chief feature of the alternate theoretical accounts like current buying power accounting or replacing cost accounting is a mechanism to capture the loss or addition in the value of non-monetary points on the current rating footing. It helps to enter assets on the balance sheet with realistic values. The balance sheet can portrait true image of fiscal place of an administration ( DL MBA Material, 2003 ) . It can suit the effects of rising prices or deflation & A ; do fiscal statement more economically relevant.

The chief drawback of the alternate theoretical accounts is alterations in the monetary values are captured but these are non based on existent existent dealing. These theoretical accounts are complicated and values are subjective. It may go on that the general Consumer Price index or rising prices has gone up but the impacts on assets have been rearward or non that important. In such instance, the attendant value will be erroneous. Hence they lack in dependability.


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