Financial Reporting Lecture 1

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Historical Cost Accounting

Benefits of HCAstood test of practical application

familar and generally understood

assists in control function

readily documented

objective

easily audited

less use of subjective estimates

less use of contingent events

Limitations of HCA

backward looking

mixed values in balance sheets

matching out of date costs against current revenues

failure to disclose P/L on monetary items

doesnt cover all assets

cannot compare between companies

figures produced not useful for capital maintenance

not suitable base for taxation

lack of information required to value a business

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