12 1 Identify and Describe Current Liabilities Principles of Accounting, Volume 1: Financial Accounting

As a final key element, Dambrin and Robson (2011) present the control systems as enablers of practical action. They show that control systems not only facilitate control, discipline or reward of the pharmaceutical representative’s actions, as depicted in previous management accounting literature. Their findings suggest that the control systems also enable a more efficient practice of the representatives in the form of self-organisation and self-management. The inscriptions produced to report their actions to the superiors also played a significant role in their own work.

  1. For several years, including 2010 and 2011, the accounting treatment of business combinations, specifically purchase price allocations and goodwill impairment testing, have been at the top of the list of accounting infringements (FREP, 2010, 2011).
  2. Particularly, this study aimed to contribute to previous knowledge by illustrating how one wished-for social outcome became more legitimate or faithful than any other.
  3. Finally, the timing of the case study presents an opportunity to illustrate the work organisations put into including “abnormal” ambitions in their impairment calculations.
  4. This example illustrates how current value accounting can make a company’s financial statements more responsive to changes in market conditions.

Under the current value accounting method, all assets and liabilities are shown in the balance sheet at their current values. The difference in the value of net assets at the start and end of the year is known either as profit or loss. For example, companies computing net income or preparing balance sheet on monthly basis would have to establish a new sales value for inventory and other assets at the end of each month which is usually inconvenient. Any valuation basis other than historical cost may create serious issues for companies.

However, when methods of current-cost accounting are introduced it will be necessary to define the concept of current value more precisely. When a company prepares its balance sheet, most of the assets are listed at their historical cost. However, some highly liquid assets are subject to exception of historical cost concept. Depending on the nature of the business and the products it markets, current assets can range from barrels of crude oil, fabricated goods, inventory for works in progress, raw materials, or foreign currency.

The issue of assets and income valuation has long been a contentious issue for accounting standard setters and capital market regulators. In essence, advocates of current values argue that they provide users of accounting information with relevant information that is not readily available from other sources. While opponents of the current values argue that they do not provide reliable information because they are difficult to verify and are vulnerable to managerial manipulation. This paper further elaborates the usefulness and the shortcomings of both historical cost and current cost accounting. It also provides some insights on those valuation methods from the Islamic point of view. Interestingly, it appears that both valuation methods have its relevance and importance in Islam and this primarily depends on the contextual factor.

For example, if shares of a company trade in very low volumes, it may not be possible to convert them to cash without impacting their market value. These shares would not be considered liquid and, therefore, would not have their value entered into the Current Assets account. By definition, assets in the Current Assets account are cash or can be quickly converted to cash. Cash equivalents are certificates of deposit, money market funds, short-term government bonds, and treasury bills.

We may earn a commission when you click on a link or make a purchase through the links on our site. Suppose a company, XYZ Corp., purchased an investment property 10 years ago for $1 million. Over the years, the value of this property has increased, and it is now worth $1.5 million in the current real estate market. Of the many types of Current Assets accounts, three are Cash and Cash Equivalents, Marketable Securities, and Prepaid Expenses. For example, there is little or no guarantee that a dozen units of high-cost heavy earth-moving equipment may be sold over the next year, but there is a relatively high chance of a successful sale of a thousand umbrellas in the coming rainy season.

To perform and understand the calculation, the actors had to “look elsewhere” (Huikku et al., 2017, p. 78). Once the rules are established, the chain of transformation is transparent and the creation of the sign becomes reversible. As consequence, the signs can become epistemologically objective even though their construction is ontologically subjective.

Advantages of Current Value Accounting

In the next section, these three aspects will be discussed further through the lens of the study of associations. The purpose of this study is to shed light on the tools, processes and negotiations involved in the formation of acceptable current values in the context of goodwill impairment testing. The study raises the questions of how a current value for goodwill becomes a faithful representation and how one expectation about the future becomes more convincing than other expectations. Fair value also represents the value of a company’s assets and liabilities when a subsidiary company’s financial statements are consolidated with a parent company. Historical cost accounting is important to financial reporting because it provides an objective view, where the actual cost of the item can be traced. It provides a fair basis of depreciation and it is a stable, simpler and more cost-effective method.

How Do Investors Use Current Assets?

The following journal entries are built upon the client receiving all three treatments. First, for the prepayment of future services and for the revenue earned in 2019, the journal entries are shown. Some assets, such as land and buildings, may be valued current value accounting at their current market value. Other assets, such as cash and investments, may be converted to their current value by using an appropriate index. Liabilities may be converted to their current value by multiplying them by a conversion factor.

Products and services

In addition, the measurement base needs to provide information that is comparable, verifiable, timely and understandable. The Board believes that when selecting a measurement base, the amount is more relevant if the way in which an asset or a liability contributes to future cash flows is considered. This means that an entity’s business model should affect the measurement of its assets and liabilities. Per IAS 40 Investment Property, property held for rental or capital appreciation can be measured at historical cost or fair value. When deciding on the measurement base in this situation, preparers of the financial statements should consider what purpose the property is held for.

Current value is also of use when there has been a prolonged period of excessive inflation. Current assets are any asset a company can convert to cash within a short time, usually one year. These assets are listed in the Current Assets account on a publicly traded company’s balance sheet.

Operational staff usually had a negative attitude towards impairment calculations because of the additional administration and limited internal use. Unlike the case of the drug representative’s self-assessments in Dambrin’s and Robson’s (2011) case, however, the bricolage and triangulation of information could not exclusively build on organisational internal inscriptions. In a financial accounting context, the bricolage needs to span across and outside the organisation, including allies such as banks, analysts and market research institutes. Additionally, not only the number of traces was relevant but also their associations, providing them with legitimacy. Organisation external valuation experts were necessary to create a “network of trust” (Power, 1996) that created legitimacy for the judgements.

However, two interviews were conducted with German business units from two different international divisions to capture the different divisions’ reporting activities. In total, the study builds on 42 interviews with 37 employees, all audiotaped and transcribed. The interviews were conducted with personnel from different units, on different hierarchical levels and in different disciplines including financial accounting, controlling, human resources, finance and internal audit. The documents included budgets, IFRS-related documents such as guidelines, training materials and newsletters, as well as publicly available information about the group and its operational units.



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