Discuss why the historical-cost accounting model may not provide decision-relevant information in an inflationary environment. MUST...

Discuss why the historical-cost accounting model may not provide decision-relevant information in an inflationary environment.

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Expert Solution

Historic cost accounting basically refers to reporting cost of assets in the financial statements at the price at which they were acquired. It is based on the principle that only realised revenue must be reported in the income statement.In times of inflation, the value of money declines and thus the monetary unit shrinks in value as the prices rise.Historical cost accouting totally ignores this decline in value.In historical accounts, the incomes and expenditures and assets and liabilities has a mixture of values based on the dates at which each item was originally brought into the accounts.This creates serious problems in measuring and communicating results of a business Enterprise.HCA does not even match current revenue with current cost of operations as cost is a mix of historical and present costs. This distorts profitability and makes decision making difficult.The inflated profits under HCA might not be real profits and can be illusionary.

ekkarill92 answered 1 year ago

Why is the analysis of historical accounting information relevant when we do valuations?

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