Chapter 11

Measurement systems

‘What is a Cynic? A man who knows the price of everything and the value of nothing.’

Oscar Wilde, Lady Windermere's Fan (1892), Wiley Book of Business Quotations (1998), p. 349.


Learning Outcomes

After completing this chapter you should be able to:

  • Explore the importance of accounting measurement systems.
  • Critically evaluate historical costing.
  • Investigate the alternatives to historical costing.

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Chapter Summary

  • Measurement systems determine asset valuation and profit measurement.
  • The capital maintenance concept is concerned with maintaining the capital of a company.
  • Historical cost, which records items at their original cost, is the most widely used measurement system.
  • Current purchasing power adjusts historical cost for changes in the purchasing power of money (i.e. inflation).
  • Replacement cost is based on the cost of replacing assets.
  • Realisable value is based on the orderly sale value of the assets.
  • Present value is based on the present value of the discounted net cash inflows of an asset.
  • Modifications to historical cost are the valuing of inventory at the lower of cost or net realisable value or, in the UK, the revaluation of property, plant and equipment. ...

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