Discussion Question - need help

[luke_rulz94]

I came across this question on a practice exam and I am having some trouble.

' Bunny has been informed that the business should adopt the Historical Cost principle. Discuss how historical cost impacts the balance sheet. ( 5 marks )

[BoredSatan]

I'm not going to fully answer this question but think about agreed values, depreciation and their effect (over, understated, maybe even no effect?)

[Flying Emu]

The historical cost principle is just stating the value of assets at their original price purchased for.

Since assets are recorded on the balance sheet, it may reduce, or increase the value of certain assets.

This is just a guess btw so don't hold me for it =/. ^^^ Some1 to confirm.

[qqla]

I would talk about qcs and principles such as how relevance overrides reliability+historical cost. You could also talk about how historical cost supports reliability, source documents, ensures that they ensure that reports are free more estimate and bias etc.

Disadvantages would probably be the evaluation of depreciable NCA's though, and how historical cost fails to recognize the allocation of the expense - hence undermining relevance. Disadvantages of undertaking straight line depreciation could also be slotted in, but might be a tad off topic.