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Keeping an asset implies reinvestment in the asset. Finance theory is consistent with the notion that...

Keeping an asset implies reinvestment in the asset. Finance theory is consistent with the notion that reinvestment is at current value, or replacement cost. Such a decision is presumably based on comparing expected future cash flows that will be generated by the asset and the cost of replacing it with a new one that could generate the same or different cash flows. According to the conceptual framework, the purpose of financial statements is to provide information regarding performance. Investment or reinvestment decisions are a part of that performance. Yet, the historical cost of fixed assets is retained and allocated over subsequent accounting periods.

b. Does cost allocation provide relevant information?

c. Would a current?value approach to measurement of fixed assets be preferable? Why?

Business   Accounting   
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Answer #1

Cost allocation in respect of assets like plant and machinery means the number of years in which the cost is allocated. Cost allocation provide relevant information like the useful life of the asset, cost of the asset, cost treated as expenses in the current year.

Part C

No it wont be preferable because in this approach knowledge of reinvestment value of the assets would be required at the end of year which can be impractible to obtain especially if the asset is old or specialised in nature that its market value is not obtainable. This can lead to manipulation by manage to show better perfomance, thus defeating purpose of conceptual framework

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