Question

State whether you agree with the use of historical cost rather than current market values, and explain your position.

Answer 1

Answer

Historical cost is the cost at which assets are are presented at their value at the time acquisition on balance sheet. While Under current market value approach assets are are presented at their currrent market values.

It will not be correct to say that historical cost to be used rather than current market values.

• As in the long run a company wants to have all the assets and liabilities recognized in statements of financial position at their fair values, rather than at amounts based on their historical cost.
• The true net worth will be known.only when financials are at current value and not at historical cost.
• Also from the point of view of investors fair value / current market value is important for decision making.
• Assets and liabilities valuation should be based on the present value of the future cash flows to the organisation.

From the above we can say that current market value is to be used rather than historical cost.