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Historical cost and current cost proponents have a common belief that entry prices must be used whether the firm can continue production. they argue that exit price accounting is too narrow in its interpretation of economic value.The critical event in exit price accounting does not relate to the performance of the firm but instead, concerns price changes of assets and liabilities. Because the emphasis is on price changes rather than operations, it can be difficult to evaluate the firm with reference to its operating efficiency because it concentrates on financial liquidity and short-term decision making.Historical cost and current cost proponents have a common belief that entry prices must be used whether the firm can continue production. they argue that exit price accounting is too narrow in its interpretation of economic value.The critical event in exit price accounting does not relate to the performance of the firm but instead, concerns price changes of assets and liabilities. Because the emphasis is on price changes rather than operations, it can be difficult to evaluate the firm with reference to its operating efficiency because it concentrates on financial liquidity and short-term decision making.
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What is exit price accounting?
Exit price accounting is a form of current cist accounting which occures when an entity decisde to exit the industry, it sold out its assets based on its net selling prices at the balance sheet date and on the basis of orderly sales.
Is exit price accounting retrospective or forward looking in its approach?
Exit Price Accounting is forward looking as it takes into consideration exit prices. That is, we have to look at what would be the price of the asset if we were going to sell it in the future. The concept of going concern is questioned here because if the firm is supposed to continue operations indefinitely in the foreseeable future, then why does it have to sell its assets? Here, Exit Price certainly comes under the limelight of critics!
What is Continuously contemporary accounting?
successful operations are based on an organisations ability to adapt to change. valuations based on exit price=net selling price in an orderly market (current cash equivalents )
What is contemporary account?
successful operations are based on an organisations ability to adapt to change. valuations based on exit price=net selling price in an orderly market (current cash equivalents )
Concept of capital and capital maintenance?
The concepts of capital give rise to the following concepts of capital maintenance:1. The financial capital maintenance concept is that the capital of a company is only maintained if the financial or monetary amount of its net assets at the end of a financial period is equal to or exceeds the financial or monetary amount of its net assets at the beginning of the period, excluding any distributions to, or contributions from, the owners.2. The physical capital maintenance concept is that the physical capital is only maintained if the physical productive or operating capacity, or the funds or resources required to achieve this capacity, is equal to or exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, or contributions from, owners during the financial period.The concept of capital maintenance is concerned with how an enterprise defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an enterprise's return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a net loss.The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a particular basis of measurement.Selection of the basis under this concept is dependent on the type of financial capital that the enterprise is seeking to maintain.The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the enterprise. In general terms, an enterprise has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognized as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the enterprise are viewed as changes in the measurement of the physical productive capacity of the enterprise; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This framework is applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board of IASC to prescribe a particular model other than in exceptional circumstances, such as for those enterprises reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.PrinciplesAccounting has not yet advanced to a state of being able to value a business (or a business's assets). As such, many transactions and events are reported based upon the historical cost principle (in contrast to fair value). This principle holds that it is better to maintain accountability over certain financial statement elements at amounts that are objective and verifiable, rather than opening the door to random adjustments for value changes that may not be supportable. For example, land is initially recorded in the accounting records at its purchase price. That historical cost will not be adjusted even if the fair value is perceived as increasing. While this enhances the "reliability" of reported data, it can also pose a limitation on its "relevance."The FASB defines "fair value" as "the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties" (FASB, 2004a).4 As the FASB notes, "the objective of a fair value measurement is to estimate an exchange price for the asset or liability being measured in the absence of an actual transaction for that asset or liability." Implicit in this objective is the notion that fair value is well defined so that an asset or liability's exchange price fully captures its value. That is, the price at which an asset can be exchanged between two entities does not depend on the entities engaged in the exchange and this price also equals the value-in-use to any entity. For example, the value of a swap derivative to a bank equals the price at which it can purchase or sell that derivative, and the swap's value does not depend on the existing assets and liabilities on the bank's balance sheet. For such a bank, Barth and Landsman (1995) notes that this is a strong assumption to make particularly if many of its assets and liabilities cannot readily be traded.I will return to the implications of this problem when discussing implementation of marking-to-market issues below. Fair value is an exit value (the price received to sell an asset) and transaction costs are not included (hence the substitution of 'price' for 'amount'). Moreover, the reference to a marketrather than a transaction between parties emphasizes the requirement that the measure be non entity specific, i.e. it should be based on a hypothetical best market price rather than the price actually paid or that would be actually obtained by the reporting entity. More recently, standard setters have preferred to use the term fair value, meaning a current market value.
Is economic profit always less than accounting profit?
No economic profit is not always less than accounting profit; However, if accounting profit is less than economic profit the business would exit the industry.
What is exit price accounting?
Exit price accounting is a form of current cist accounting which occures when an entity decisde to exit the industry, it sold out its assets based on its net selling prices at the balance sheet date and on the basis of orderly sales.
Is exit price accounting retrospective or forward looking in its approach?
Exit Price Accounting is forward looking as it takes into consideration exit prices. That is, we have to look at what would be the price of the asset if we were going to sell it in the future. The concept of going concern is questioned here because if the firm is supposed to continue operations indefinitely in the foreseeable future, then why does it have to sell its assets? Here, Exit Price certainly comes under the limelight of critics!
What is the advantages of exit price accounting?
it is relevant and reliable information. The information is useful to the users. The reality is the use of exit price accounting involves references to real world example. For example, depreciation is a decline in the market price of non current asset. There is no depreciation when there is increase in price or no changes in value of the non current asset.
What is Continuously contemporary accounting?
successful operations are based on an organisations ability to adapt to change. valuations based on exit price=net selling price in an orderly market (current cash equivalents )
What are the major characteristics of perfect market?
1) Firms and consumers are price-takers. 2) Large degree of good substitutability. 3) Free entry and exit. 4) Long-run: Price = Marginal Cost = Average Cost; Economic Profit = 0
Explain the process that drives the economic profit to zero in the long run for a perfectly competitive firm?
In perfectly competitive markets, economic profits are zero in the long run because firms are able to enter and exit the market. If firms in a perfectly competitive market are profitable, there would be an incentive for new firms to enter. Supply would increase, causing an increase in quantity and the price to be driven back down to equilibrium: NO PROFIT! If firms in a perfectly competitive market are suffering a loss, some firms would choose to exit the market. Supply would decrease, causing a decrease in quantity and the price to be driven back up to equilibrium: NO PROFIT!
Firms in an industry will not earn long-run economic profits if?
In long run under perfect competition new firms enters into the market and share the profit of existing firms due to free entry and exit .the new firms in the long run enters into the market until they earn profit and leaves the market if they suffer looses. In short if there is free entry and exit
What is exit outlet?
In shopping, you have retail and outlet. Retail is the price you pay when a product is new in the season, not on sale. An outlet product is a product of, for example, last season, which will be "out". Exit outlet is outlet that will be removed from the shop, thrown away basically. That is why exit outlet is the cheapest.
What is contemporary account?
successful operations are based on an organisations ability to adapt to change. valuations based on exit price=net selling price in an orderly market (current cash equivalents )
What factors should drive a company to continue in expand or exit its chosen market?
profit maximisation and creating brand awarness should be the key which drives the company to expand its market.
Redemption price of mutual fund shares?
The redemption price of mutual fund units is the close of business NAV of the mutual fund minus the applicable exit load. Let us say you have 1000 units of a fund that is currently having an NAV of $15 and you have a 0% exit load situation you will be getting $15,000 if you redeem your investment.
