Chapter 7 - Conceptual Framework: measurement

Question 1

What are the 4 measurement basis?

Answer 1

• historical cost
• current cost
• value in use
• fair value

Question 2

What is historical cost?

Answer 2

items are recorded at the amount of consideration given at the time of acquisition

Question 3

How are assets recorded?

Answer 3

at the price that was actually paid to originally acquire them

Question 4

How are liabilities recorded?

Answer 4

at the proceeds received in exchange for the obligation

Question 5

what is current cost?

Answer 5

items are carried at the value to be paid to acquire the equivalent item currently

Question 6

What is value in use?

Answer 6

items are carried at the discounted present value of future cash flows relating to the item

Question 7

What is fair value?

Answer 7

items are carried at the amount that could be obtained from an orderly disposal

Question 8

What are some advantages of historical cost?

Answer 8

Easy to understand
Straightforward to produce
Objectives
Values can be confirmed to original invoice
Gains not recorded until realised

Question 9

What are some disadvantages of historical cost?

Answer 9

Assets understated
Calculation of return on assets is meaningless
Profits understated
Distorts ROCE

Question 10

What are the 2 main forms of current value accounting which seek to takle the adv and dis adv of historical cost?

Answer 10

Constant purchasing power
Current cost Accounting

Question 11

What is constant purchasing power?

Answer 11

figures in the financial statements are adjusted to reflect amounts with the same purchasing power, using general price index

Question 12

what is current cost accounting?

Answer 12

all costs in the SPL are adjusted to show the value of assets consumed during the period, based on current rather than historical value

Question 13

What happens if there are falling prices in relation to historical cost?

Answer 13

Profits will be understated and assets will be overstated