A product mix or assortment is the set of all products and items that a particular seller offers for sale. This level takes into care of all the possible augmentations and transformations the product might undergo in the future. This level prompts the companies to search for new ways to satisfy the customers and distinguish their offer. Successful companies add benefits to current value accounting their offering that not only satisfy customers, but also surprise and delight them. As companies raise the price of their augmented product, some companies may offer a stripped- down” i.e. no-augmented product version at much lower price.

• For instance, Intel upgraded its Celeron microprocessor chips to Pentium 1, 2, 3 and now 4.
• As shares trade, investor demand creates the appropriate bid and ask prices, or market value, and influences each investor’s fair value estimate.
• The Conceptual Framework strikes a balance between relevance and faithful representation in order to provide useful information to the users of financial statements.
• Mark-to-market measures the current market value of the asset while the historical cost accounting principle measures the value of the original cost of an asset.

The minimum amount, however, would be the amount of cash that could be obtained by discounting or selling the bill to a bank or other financial institution. (i) The expected cash receipts generally depend upon subjective probability distributions that are not verifiable by their nature. So when the products are not satisfactorily performing, the product managers need to drop them form the product line.

B. Supporting Investment and Decision-Making

This can be beneficial during times of inflation or market volatility, as it prevents the overstatement of an entity’s financial position. However, critics argue that historical cost can lead to financial statements that are out of touch with reality, especially when the market value of assets differs significantly from their recorded cost. This paper reviews fair value accounting method relative to historical cost accounting. Although both methods are widely used by entities in computing their income and financial positions, there is controversy over superiority. Historical cost accounting reports assets and liabilities at the initial price they were exchanged for at the time of the transaction.

This approach aligns with the International Financial Reporting Standards (IFRS), which emphasize fair value measurement. By focusing on replacement cost, CCA provides a more realistic view of an entity’s financial position, particularly in volatile economies. In accounting, balancing historical costs and current values is crucial for ensuring accurate financial reporting, strategic decision-making, and asset valuation.

Fair Value vs. Historical Cost

Such items whose amounts are fixed and do not require reassessment are also known as money value items. In the futures market, fair value is the equilibrium price for a futures contract or the point where the supply of goods matches demand. This is equal to the spot price and accounts for compounded interest and lost dividends resulting from the futures contract ownership versus a physical stock purchase.

Current Replacement Cost

For example, companies computing net income or preparing balance sheet on monthly basis would have to establish a new sales value for inventory and other assets at the end of each month which is usually inconvenient. Any valuation basis other than historical cost may create serious issues for companies. For example, if a company uses current market value or sales value rather than historical cost, each member of accounting department is likely to suggest a different value for each asset of the company. On the other hand, current value accounting involves, periodically updating the value of the items and to be recorded at that value, on which they can be currently sold in the market. Furthermore, in accordance with accounting conservatism, asset depreciation must be recorded to account for wear and tear on long-lived assets. Fixed assets, such as buildings and machinery, will have depreciation recorded on a regular basis over the asset’s useful life.

Call Price

• Balancing historical costs and current values is essential for accurate financial reporting, investment decision-making, and regulatory compliance.
• The four enhancing qualitative characteristics are timeliness, understandability, verifiability and comparability.
• From opening the right type of business credit card to determining how much revenue you’ll bring in per product, these tasks will all contribute to your business’s success, now and ….

However, some highly liquid assets are subject to exception of historical cost concept. The market value of an asset is assigned by the investors on that particular date i.e. based on the current price of that asset traded in the financial markets. It is calculated by multiplying the market price per share of the company with the number of outstanding shares. This value captures the maximum amount the entity would lose if the asset is disposed of. Net present value (NPV) is the value of an asset calculated by discounting the future cash flows expected to be generated by the asset. Another problem posed by the price level changes (and more so by inflation) is that how much depreciation should be charged on fixed assets.

Fair Value in Stock Investing

Under first-in-first out method (FIFO) cost of sales comprise the entire opening stock and current purchases less closing stock. But under the last-in-fist-out method (LIFO) cost of sales comprise mainly of the current purchases and it is only when the cost of sales exceeds current purchases, opening stock enters into cost of sales. It requires determining the right price between two parties depending on their interests, risk factors, and future goals for the asset. Fair value is most often used to gauge the true worth of an asset by looking at factors like its potential for growth or the cost to replace it.

Capitalized Cost

Verifying the accuracy of data on replacement cost or realisable value is not possible because the data cannot be compared with actual results. (iv) The discounted value of the differential cash flows of all of the separate assets of the firm cannot be added together to obtain the value of the firm. This is partly due to the joint-ness of the contributions of the separate assets, but it is also due to the fact that some assets, such as intangibles, cannot be separately identified. Current cost has become an important valuation basis in accounting, particularly as a means of presenting information regarding the effect of inflation on an enterprise. At times a company finds that over the years it has introduced many variants of a product in the product line. In this process the product lines become unduly complicated and long with too many variants, shapes or sizes.

Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. (ii) To make necessary entries for recording the changes in the ledger using the index numbers and the replacement cost. (ii) To provide sufficient funds to replace the assets after the expiry of the life of the asset.

However, the volatility of current values can also introduce uncertainty and risk, as the value of assets may change rapidly in response to market conditions. However, critics argue that the historical cost principle may lead to a distorted view of a company’s true worth, especially in times of inflation or when the market value of assets has significantly changed. They contend that this method fails to provide relevant information for decision-making purposes, as it does not reflect the current economic realities.