other financial statement accounts based on their direct relationship with sales. This method of forecasting was used due to the lack of information available (only the last three years of financial statements). As a result, every account in the pro forma financial statements are based on one or more key assumptions about their relationship with sales: Sales: It is assumed that sales turnover will continue to grow at a rate of 11% every year. This figure is the historical average of growth (change)
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reported at liquidation value. (Do not use historical cost principle.) 3. Monetary unit assumption (46) - (j) assumes that the dollar is the “measuring stick” used to report on financial performance. 4. Periodicity assumption (46) - (g) separates financial information into time periods for reporting purposes. 5. Historical-cost principle (47) - (b) Indicates that market value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle
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QUESTION 1 PART A: EROSION OF CAPITAL Historical cost is adopted and used by many businesses in Australia. Despite being used by majority, one of the main disadvantages of Historical cost is fails to maintain intact other concepts of capital like constant purchasing power capital, except money capital. It fails to measure assets at their current cost but only use their current cost. In order to maintain capital properly, it should be able to cover the replacement cost of the asset. Air Monash have been
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[Instructor] [Date] Importance of Financial Structure and Statements Introduction This essay discusses the role of financial structures on the profitability and stability of companies and the role of financial statements prepared using historical cost convention and accruals concept in the decision making process. Both aspects of companies discussed here are of much importance as they directly affect companies, their financial condition and the representation of facts to the relevant users
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4 The cost of capital is a central concept in financial management linking the investment and financing decisions. Hence, it should be calculated correctly and used properly in investment evaluation. Despite this injunction, we find that several errors characterize the application of this concept. The more common misconceptions, along with suggestions to overcome them are discussed below; The concept of cost of capital is too academic or impractical. Some companies do not calculate the cost of capital
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operations indefinitely – except if there is evidence that the business firm will close its operations in the near future. A business firm whose status is going concern reports assets based on their historical value. Similarly, assets carry a book value equivalent to the difference between their historical value and accumulated depreciation. Under this assumption, market values are ignored as the business firm will continue operating indefinitely. Accounting Entity Assumption: Basically, the accounting
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1. Historical Cost Concept 2. Prudence Concept 3. Economy Entity Concept 4. Money Measurement Concept 5. Time Period Concept 6. Going Concern Concept 7. Dual Aspect Concept 8. Revenue Recognition Concept 9. Matching Concept 10. Consistency Concept 11. Materially Concept In light of these concepts, the three key financial statements namely Balance Sheet, Profit and Loss and Cash Flow statements are analyzed. 1.Historical Cost Concept
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standards accountants must follow when preparing financial statements. A contra-asset account is an account used to accumulate information separate from, but related to, a specific account. For example, rather than crediting a capital asset directly for accumulated amortization, a contra-asset account is used, Accumulated Amortization, to do so. Contra-asset accounts have an opposite normal balance to the account it relates to. You can have a
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concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects. a. True b. False 2. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. a. True b. False 3. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the
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measurement method in financial reporting to as whether a traditional basis of measurement, which is the historical cost should be use or a new basis which is the fair value should be considered. Historical cost accounting records the value of an asset on the balance sheet as the price at which it was originally purchased, which is the date of acquisition. Therefore, it is based on its nominal or original cost. In an era market by the widespread use of complicated financial instruments and risk management
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