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In: Accounting

1) Does the use of some sort of ‘current cost’ for statement of financial position valuation...

1) Does the use of some sort of ‘current cost’ for statement of financial position valuation increase the usefulness of the statement? Does it cause problems?

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Expert Solution

Such statement is popularly known as balance sheet. Basically it is prepared on historical cost at the end of a financial year.

Now, if it is not prepared on historical cost but on current cost it would be helpful or useful for stakeholders like, shareholders, bankers, top management, etc. It would be helpful for their decision making purpose; such as a banker wants to calculate current ratio (= (Current assets / current liabilities)) of a company and if it is more than 2 a loan will be sanctioned. If the current cost of all current liabilities and current assets are provided to the bank, it would be easier for the bank finding those current values and getting an authentic calculative figure.

It may creates problem too: (1) if all figures in the balance sheet are not in current cost, then there will be a combination of historical cost and current cost which creates a hybrid balance sheet and can create confusion in the mind of users. (2) There could be guess work for ascertaining current values of some items, because the exact values are not available; this think can misguide people.    

ekkarill92 answered 1 year ago
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