Normative Theories of Accounting Flashcards
1
Q
normative theory
A
prescribes what should be done based on specific goal or objective.
2
Q
historical cost
A
- measure the value of assets and liabilities at time of acquisition.
- profit and loss only recognised when sold
3
Q
HC gives true and fair view of assets assuming..
A
that money holds a constant purchasing power - which it doesn’t (inflation, shifts in customer preference)
4
Q
HC Issues
A
- suffers from problems of irrelevance in times of rising prices.
- overstates profits in times of rising profits
- problem of additivity (apples and pears)
5
Q
HC alternatives for changing prices
A
current purchasing power
current cost asccounting
continuously contemporary accounting (exit price accounting)
6
Q
Current purchasing power accounting
A
- no need for revaluation
- only need to know price index
- all adjustments done at end of period
7
Q
CPP strengths
A
- easy to apply
- relies on data already available under HC accounting
- no need to incur cost of effort to collect data
8
Q
CPP criticisms
A
- which price index should be used?
- info might be confusing to users
- same index for all users
- studies find not relevant for decision making
9
Q
Current Cost Accounting
A
- holding gains or losses can be treated as income
- determines valuations with replacement costs = how much would it cost us if we bought it today?
10
Q
CCA strengths
A
- better comparability of various entities’ performance
11
Q
CCA criticisms
A
- replacement costs do not reflect how much its worth if sold
- very difficult to determine replacement costs
12
Q
Continuously contemporary accounting
A
- rather than relying on sales, profit is directly tied to increase/decrease in current net selling prices of assets
13
Q
CoCoA strengths
A
- focuses on new opportunities
- assumes the objective of accounting is to guide future actions
14
Q
CoCoA criticisms
A
- are exit prices relevant if we do not expect to sell the assets?
15
Q
Fair Value Accounting
A
involves measuring and reporting the value of certain assets and liabilities at their current market prices
