Question

In: Accounting

Identify and describe three (3) alternatives to Historical Cost Accounting (HCA).

Identify and describe three (3) alternatives to Historical Cost Accounting (HCA). In your description, outline the underlying assumptions of each alternative and provide examples of how each method could be applied in practice. Critically evaluate whether any of these alternatives represent a viable alternative to historical cost accounting.

Solutions

Expert Solution

Accounting Bodies have introduced number of alternative accounting method to Historical cost method. Opportunity cost are commonly used in economics and do not have much relevence here, however accounting bodies and academic commentators have forwarded new methods of accounting using the current asset value, as opposed to the conventional acquisition cost.

Replacement cost could be used as possible alternative to historical cost method.. Replacement cost may be defined as the estimated amount that would have to be paid in order to replace the asset as the date of valuation.An advantage of replacement cost is that it focuses on the service the assets will provide rather than the precise physical asset. It therfore excludes speculative gains that might be made from seeling a building to a purchaser who will redevelop it for an alternative use, equally it allows valuations to reflect the use that the current owner can make of an asset, even if a purchaser would not be able to employ the asset as profitably.

The replacement cost odf an assets will vary depending upon the size of the order. i.e. economies of scale.

More Accounting systems such as Current cost accounting, Exit price method,etc are possible alternative to historical cost accounting but these are also subject to manipulation to set norm for measuring corporate performance.


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