Question

discuss why the historical-cost accoutning model may not provide descision-relevant information in an inflationary enviroment

Answer 1

Historical Cost Accounting Model is a model in which the value of asset on the balance sheet is recorded at its original cost when it was purchased/acquired by the organisation.This model completely ignores the fair value of accounting.This model is used under the generally accepted accounting principles.It is the most commonly and widely used basis of financial reporting.

The historical cost accounting model requires amount of all financial items to be recorded based upon original cost, even tough items value has increased due to inflation.As a result of this the income statement,do not show realistic profit.It doesn't show the true value of the assets. Depreciation is charged on original cost of the fixed assets in historical cost accounting model, it is not charged at the price at which the same assets are acquired.Hence the provision remains inadequate.