Question: Keeping an asset implies reinvestment in the asset Finance theory

Keeping an asset implies reinvestment in the asset. Finance theory is consistent with the notion that reinvestment is at current value, or replacement cost. Such a decision is presumably based on comparing expected future cash fl ows that will be generated by the asset and the cost of replacing it with a new one that could generate the same or different cash fl ows.
According to the conceptual framework, the purpose of fi nancial state-ments is to provide information regarding performance. Investment or rein-vestment decisions are a part of that performance. Yet, the historical cost of fi xed assets is retained and allocated over subsequent accounting periods.

a. Present arguments in favor of cost allocation.
b. Does cost allocation provide relevant information?
c. Would a current- value approach to measurement of fi xed assets be prefer-able? Why?
d. Would a current- value approach be consistent with the physical capital maintenance concept? Explain.
e. What problems and limitations are associated with using replacement cost for fi xed assets?

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  • CreatedDecember 17, 2014
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