Bao3309 Essay

689 Words3 Pages
PART A HISTORICAL COST: Historical Cost is the most popular formula used by organizations in preparing their financial reports, as its advantages are very clearly. At first, Historical Cost method is not hard to use, and not necessary to reference to market values. Next, users can easily get well with this method while it is easy to understand and get acquainted with. For that reason, the users will easily penetrate the financial reports through the Historical Cost method, even they do not have financial background. On the other hand, it also gets some disadvantages. When using this method, it is required that the purchasing power of the dollar remains unremitting. But in fact, this power can be unstable. In the inflation period, the cost of asset always shift, so it does not make sense to record the value of asset using the Historical Cost method when the price keeps changing overtime. It can reflect the wrong financial position of the entity at that time. Moreover, this method depends on financial capital maintenance perspective, so it easy to lead to an overstatement of profits in times of inflation. When that happens, it means that the company needs to pay more dividends and of course it is not good for the company. It also causes decreasing the entities’ capacity to adapt to changing circumstances. REALIZABLE VALUE: Realizable Value Method provides relevant and essential information which is useful appraises capacity for adaptation and liquidity of a firm. Nevertheless, some significant causes disadvantages to the Realizable Value base. Firstly, Realizable Value depends on net selling price, but with some kinds of assets, for example: goodwill, it cannot be sold separately. Hence, the Realizable Value method is difficult to use. It needs professional and experienced background. Secondly, for the same asset, put it in the different markets, it can be sold in

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