Cost and cash flow
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1) Why abandon historical cost? How does SFAC 7 fit with the concepts framework?
2) Which more accurately meets the requirements of the qualities of accounting information, discounted cash flows or using the present value at the risk-free rate of expected cash flows? Why? Which qualities matter most in your answer?
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There is no need to abandon historical costs as these form the basis of several transactions given in the current GAAP. There are some problems with historical costs like it does not consider the current market value of the asset and it does not consider the effects of inflation on the value of assets. The SFAC 7 states "The objective of using present value in an accounting measurement is to capture, to the extent possible, the economic difference between sets of future cash flows.". However this does not mean that historical cost is abandoned. Historical costs ...
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- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
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