Question

1. What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations.

Answer 1

The valuation method in which the assets and liabilities are valued at their original costs, it is said to be evaluated at the historical cost.

Even if the price of the assets increases after a point of time, in the balance sheet it is still recorded at their original cost.

As the cost is at which an asset was originally bought, this is considered as historical cost. It is under basic principles of US GAAP.

Let us discuss the advantages and disadvantages of using historical valuations.

Advantages -

• It helps to maintain the objectivity and reliability of the accounting information. As the costs are the original cost at which assets are bought, it can be easily verified when required by looking at the invoices at the time of purchasing. Therefore informations are raliable. Objectivity of information is assured as there is no chance of data manipulation because there is a objective basis of transactions being recorded.

• It makes the procedure simple and convinient for accounting purpose. As the prices do not need to be restated therefore it helps in keeping the system simple. And also it's convinient for the accountants to review the prices and costs of the assets and liabilities.
• It helps to maintain the consistency of the financial statements. As the costs are maintained at their original value, the statements are carried out time over time without any difficulty.
• It makes the process of comparing financial statements easy by recording the costs ar their original value. Comparing the financial statements with the previous statements is more relevant with the assets being priced at original cost. It helps in taking decisions related to performance of company and other managerial decisions.

Disadvantages -

• It does not let the asset or liability to be recorded at their current market value therefore its hard to recognise the current value of these assets.
• It is hard to make comparisons over time.
• Generally it is felt unrealistic to users who are more concerned with the current price.
• If the non-current assets are considered, their values becomes outdated.
• The depreciation which are charged is generally low
• The Ciara stated are lower generally that could lead to more dividends to be paid.