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Chapter 2: Q2-15Q (page 61)

The chairman of the company’s board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.

Short Answer

Expert verified

Some of the arguments include precise and accurate costs, frequent revision of ascertainable costs, helpful in comparison of costs with other firms, and the costs of acquiring substitutional amounts that could exceed the benefits obtained.

Step by step solution

01

Meaning of Accounting Data

Accounting data is defined as the information or data included in journals, ledgers, and other reports that aid the accounting statements. This data helps a company track the performance of the business over a given period.

02

Arguments to convince the chairman that accounting data should be dependent on historical cost

Some of the arguments that can be used are as follows:

  • Cost is fixed and accurate, other amounts would have to be ascertained considerably temporarily, and there would be substantial disagreement as to the values to be used.
  • Values to be ascertained by different forms are needed to be revised regularly.
  • Implementation of historical costs aids to do a comparison with other firms.
  • The cost of obtaining the replacement amount may exceed the benefits received.

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Most popular questions from this chapter

BE2-11 (L06) Vande Velde Company made three investments during 2017.

(1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model.

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(3) It invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds.

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