Accounting – 6.5 Limitations of accounting statements | e-Consult
6.5 Limitations of accounting statements (1 questions)
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ABC Ltd should record the building in its financial statements at its historic cost of £200,000. The current market value of £250,000 is irrelevant under the historic cost principle.
Advantages of adhering to historic cost:
- Objectivity: The historic cost is a verifiable and objective record of the original transaction.
- Consistency: It provides a consistent basis for accounting over time.
- Comparability: Allows for easier comparison of financial statements across different periods and companies.
Disadvantages of adhering to historic cost:
- Lack of Relevance: The historic cost may not reflect the current economic reality of the asset. In this case, the financial statements may not accurately represent the true value of the company's assets.
- Misleading Information: The financial statements may be misleading if the historic cost is significantly different from the current market value.