Question

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.

Required:
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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