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ACCOUNTING
MEASUREMENT
SYSTEM
HISTORICAL
COST
ACCOUNTING
CURRENT
COST
ACCOUNTING
Objective of accounting
Stewardship function by Paton and
Littleton:
Corporation reports should rest upon
the assumption that a fiduciary
management is reporting to absentee
investors who have no independent
means of learning how their
representatives are discharging their
stewardship.
Capital & Profit
Paton and Littleton described profit
determination:
Accounting exists primarily as a means of
computing a residuum, a balance, the difference
between costs (as efforts) and revenues (as
accomplishments) for individual enterprises. This
difference reflects managerial effectiveness and is
of particular significance to those who furnish the
capital and take the ultimate responsibility

Costs attach theory
Cannot separate costs & products
Not look at current value
View of economist:
- Improper to use historical cost when the
replacement costs has risen
- Do not accept cost attach theory
- There is only one cost-opportunity cost
- The theory is invalid as sometimes cost can be
detached when price is lower

Defense of Historical Cost Accounting:
1) Historical cost is relevant in making
economic decisions
2) Historical cost is based on actual, not merely
possible transactions
3) Through history, financial statements based
on historical cost have been found to be
useful
4) The best understood concept of profit is the
excess of selling price over historical cost.
5) Accountants must guard the integrity of
their data against internal modifications
6) How useful is profit information based on
current cost or exit price?
7) Changes in market prices can be disclosed as
supplementary data
8) There is insufficient evidence to justify
rejection of historical cost accounting

Criticism Of Historical Cost Accounting:
Objective of accounting
Information for decision making
Basis of Historical cost
Matching
Notions of investor needs
Historical cost under attack

An accounting system in which assets
are valued at current market buying
price and profits is determined by
allocation based on current costs
Purposes:
1. Evaluation by managers of their past
decisions in order to make best possible
decisions for the future.
2. Evaluation of managers by shareholders,
creditors and others
Benefit including holding gain/loss in I/S:
Can determine if holding activities are successful
Better prediction of performance management
Better prediction of future cash flow
Gives credit when credit is due
Critism:
Advocate of historical cost
- Violate the traditional realization principle-expected
profit
- If firm intend to use assets, changes in market price
irrelevant
- Value of non-current asset lies in its services potential not
in its market value
- Lack of objectivity

Advocate of exit price
- Current cost is not opportunity cost
- The allocation problems continues
- Problem of additivity of numbers
- Current operating income is based on existing mode or
production.

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Cntd...
In support of current cost:
Recognition principle
Objectivity of current cost
Technology changes
EXIT PRICE
ACCOUNTING
A system of accounting which
uses market selling prices to
measure the firms financial
position and performance
In support of Exit Price Accounting:
Providing useful information
Adaptive decision making
Relevant and reliable information
Other advantages:
Additivity
Allocation
Reality
Objectivity
A measure of risk
Criticism of Exit Price Accounting:
Profit concept
Additivity
Other weaknesses
Value in use vs value in exchange

- Use of exit price does not provide relevant data to
match against revenues to measure the performance
of a firm
- Accounting must measure past events, those that
actually happened rather than those that might
happen
- If the firm was actually contemplating liquidation, the
information of exit price is relevant, but it is not for
most firms
- Current cash equivalents are themselves not additive
- It does not recognize the ability of the firm to adapt in
terms of combination of assets
- Inconsistency in the treatment of bonds as assets and
liabilities and treatment of receivables
VIU vs VIC:
An asset can have two components
Exit price ignore value in use
As asset that is held rather than sold must be
worth more to its owners than its exit price
It is absurd to record a sound investment as a
loss simply because the asset has no resale
value
Value-in-use emphasis on a long term
approach and value-in-exchange concentrate
on short term approach for valuation
Both reflect the perspectives on the purpose of
financial reporting.